IMF fears 'credit shock' in Spain if Rajoy blocks rescue

Mr Blanchard said investors had most likely anticipated a rescue by the ECB and the European Stability Mechanism (ESM). "If so, we can't be sure that yields will stay low for much longer," he said.

The Franco-Spanish tete-a-tete comes two days before leaders of a newly-dubbed "Mediterranean Front" gather in Malta to thrash out a Latin strategy and plot ways to break the German lockhold on policy. Portugal's prime minister, Pedro Passos Coelho, will join France, Spain, and Italy for the first time, suggesting that the free-market advocate may have lost its enthusiasm for the German austerity view. Diplomats say the meeting marks a break with EU tradition. For decades, France and Germany pre-cooked agendas before EU summits.