In the euro zone's simmering debt crisis, the Battle of Spain will likely be decisive in 2011.
But the European Union is preparing to fight it with one hand tied behind its back because Germany is blocking any financial lifeline for a country until it is actually drowning.
Astonishingly China, which pledged last week to buy Spanish government bonds, is doing more to help Madrid than Berlin is.
After Greece and Ireland received EU-IMF bailouts last year to cope with their swollen public debts and deficits, Portugal is everyone's next candidate for a rescue despite efforts to put its public finances in order.
In a Reuters poll last week, 44 of 51 economists surveyed expected Lisbon would need a bailout, but only seven thought Spain would need outside help, even though most expect Madrid's credit rating to suffer another downgrade soon.
Spain is the euro zone's fourth largest economy and would stretch the capacity of the euro zone's financial safety net -- the 440 bn euro (USD 570.8 bn) European Financial Stability Facility -- to the limit if it had to be rescued.
"Spain has a serious, realistic chance of avoiding a programme because of the government's actions to reduce the fiscal deficit, reduce public borrowing needs, make structural economic reforms and repair the financial sector," a senior EU official said.
After months in denial, Spanish Prime Minister Jose Luis Rodriguez Zapatero's minority Socialist government has acted to cut public spending, step up privatisation and bring forward a long-delayed pension reform.
Nevertheless, bond market pressure is likely to be fierce, with investors fleeing peripheral euro zone sovereigns because of worries over their ability to repay their debts as interest rates rise, and fears of write-downs for bondholders.
European Union officials are searching for ways to reinforce the euro zone's financial backstop by increasing its effective lending capacity and broadening its scope for action.
But German Chancellor Angela Merkel, facing hostile public opinion and fearing a constitutional court veto, has rejected any pre-emptive standby credit line for troubled euro zone countries before they are forced out of capital markets.
Berlin has so far also opposed any increase in the size of the rescue fund and any use of that money to buy sovereign bonds in the secondary market, or help recapitalise troubled banks.
German resistance will be put to the test when euro zone finance ministers meet on January 17 to discuss a comprehensive response to the potentially systemic crisis.
If they are unable to agree on any strengthening of the financial safety net, it could hasten a backlash in the markets.
"We are quite negative on Portugal. We believe it will be tapping the EFSF next. We're not so sure about Spain. It's a question of a toss of the coin," said Pavan Wadhwa, European rates strategist at investment bank JP Morgan.
Madrid's fiscal challenge was easier than that of Greece, Portugal and Ireland, Wadhwa said on a conference call, and the government was making progress in cutting the budget deficit and using privatisation revenue to reduce borrowing needs.
But the market was still pricing in a 15-20% marginal possibility of a Spanish default in each of the next five years.
Spain's woes, like Ireland's, result mostly from the bursting of a real estate bubble that was inflated by cheap euro interest rates. Unemployment stands at 20% and the economy is barely growing at all.
Although Spanish public debt is still well below the euro zone average and the two biggest commercial banks, Banco Santander and BBVA are in good shape, the state faces contingent liabilities from a damaged financial sector.
Madrid's fiscal problems are compounded by the need to recapitalise its unlisted regional savings banks, the cajas, which were merged to 17 from 45 in an overhaul last month and have an unrecognised exposure to bad real estate loans.
"The losses related to the commercial real estate sector are potentially two to three times as big as those linked to the residential sector," said Laurence Boone, research director at Barclays Capital in Paris.
She considers Spain's debt situation manageable, provided 10-year rates remain below 7%. The yield on Spanish bonds with that maturity was around 5.5% at the end of last week, but Portugal's borrowing cost was 6.95% and rising.
Spanish banks also have a large exposure to Portuguese public debt, and would suffer if they could not use Portuguese bonds as collateral in central bank liquidity operations.
Both Spain and Portugal face big funding crunches in April and mid-year. Portugal must repay more than 12 bn euros in the first half of 2011. Spain faces bond redemptions of 15 bn euros in April and 15 bn in July.
So the euro zone may not have long to build a more effective firewall before the flames start licking around the Iberian peninsula.