Spain is unlikely to be punished by markets this year despite soaring debt levels, but risks being stung in later years if deficit goals are missed as growth falters.

The country is sometimes seen as one of the peripheral eurozone members that could be hit by a funding crisis like the one the recently crafted EU/IMF loan deal has addressed in Greece.

However, Spain has managed to assure markets for now that it has a credible plan in place to cut its budget deficit from above 11 per cent of GDP last year to three per cent by 2013.

Its relatively low level of public debt as a share of GDP in comparison to European peers has helped the Socialist government gain some credibility for its deficit-cutting plans.

But that could fade fast if growth stalls as many economists expect or the government fails to enact much-needed economic reforms.

"The market is recognising the difference between Greece and Spain and the credibility the Spanish government has got. That's why we've seen a stabilisation but I don't think problems are over for Spain or the periphery," said Silvio Peruzzo economist at Royal Bank of Scotland.

The spread between Spanish and eurozone benchmark debt has fallen to around 66 basis points after hitting 110 back in February, less than one-fourth of the 462 bp peak set last week by Greece before the EU aid package was decided.

Although analysts expect Spain will have little problem meeting its €76.8 billion financing requirements this year, they will maintain a sharp look-out on actual economic growth and on economic reforms.

Both will be vital for the government to stay on course for cutting the deficit over the next few years.

For 2011, Spain says the economy will grow by just under three per cent. Economists, ratings agencies, the International Monetary Fund and even the Bank of Spain forecast the economy to face a much bleaker outlook. The latter sees GDP up 0.8 per cent.

With no dynamic return seen for the construction sector, which powered a decade of growth, Spain must raise exports and look to new areas such as renewable energy to boost growth.

But developments hinge on key reforms. While Spain has partly passed a package of anti-crisis measures, many say it has side-stepped making the labour reforms needed for the economy to grow and cut unemployment now close to 20 percent.

Javier Perez de Azpillaga at Goldman Sachs said the key for Spain could be to loosen a tough wage regime, even cutting wages by just one to two per cent.

"The sooner it's accepted that that rigidity is at odds within a monetary union like EMU, the sooner the recovery will start in earnest, the smaller the output losses, and the more transient the damage to the economy's potential," he said.