As its neighbour Portugal succumbs to a bailout, Spain insists that it won't follow despite holding €75bn of Portuguese debt
Spanish store fronts, jostling for space along a single block in Lisbon's João II street, are a sign of just how deeply Spain – which accounts for a third of all Portuguese debt held in foreign banks – is linked to its neighbour.
Spain's two global banks, Santander and BBVA, both have branches on this block, along with another bank, a hotel, a travel agency, a dentistry chain, a pizza restaurant and a supermarket – all of them Spanish businesses.
Some 8.5% of Spain's exports are sent across its western border, meaning that Portuguese austerity measures and an expected return to recession will be also be felt there.
But Spanish officials who have watched their bond yields improve even as Portugal headed towards a bailout insist there is no danger of it becoming the next eurozone domino to fall.
"(The risk of contagion) is absolutely ruled out … it has been some time since the markets have known that our economy is much more competitive," Elena Salgado, the finance minister, told the SER radio station.
Spanish banks hold around €75bn (£65bn) of Portuguese debt, though only about 30% of this is public debt. Spain had about €25bn in foreign direct investment in Portugal in 2009.
The prime minister, José Luis Rodríguez Zapatero, who has said he will not stand for a third term next year, told the Guardian last week that his socialist government would continue to meet its deficit targets.
He said it would also keep introducing reforms to boost the current timid rate of growth and start bringing down a startling 20% unemployment rate. Salgado said on Wednesday that 2011 growth would be 1.3%.
Spain's economy is bigger than those of Portugal, Ireland and Greece put together. A bailout there could have disastrous consequences for the eurozone.
"Portugal's bailout request puts the likes of Spain under the spotlight, but we are of the opinion that Spain will not follow due to its improving fiscal situation and recovering economy," Credit Agricole analysts said in a note to clients .