There are four ways that this can go:
1) Spain voluntarily quits the Euro as part of an orderly exit; the price of a BMW or a Bosch washing machine will triple overnight, but that might kickstart Spanish industry to start producing affordable goods for the home market, in turn creating employment, exports will benefit. Tourists will return as they'll get value for money. Those with UK pensions could do quite nicely out of it.
2) Spain defaults on its sovereign debt, becomes isolated in Europe, its banks fold, general chaos ensues as cash points cease operating, looting and rioting follow as people become increasingly desperate. The army will take to the streets to try and restore order possibly followed by military dictatorship under the guise of a" State Emergency".
3) Spain gets it head down and pays for the recklessness of 8 years of socialist spending. It bolsters its banks, it taxes everyone up to their eyeballs in a concerted effort to address the defecit. The 10 year debt it sells on the international bond markets is around 6%, unsustainable over any length of time. The money they generate selling bonds is what pays the wages of hospital staff / teachers / the army, the emergency services... it is required to roll over existing debt, to pay suppliers, social security. The only way to get funding in the markets at reasonable rates is for global investors to have faith in the Spanish banking system and the Spanish government's ability to cut spending. Of course no-one likes austerity, but the truth is that PSOE over 8 years pissed away every cent they could get their hands on and when the piggy bank was empty they bailed out early rather than face up to what they had done. It makes me sick after 8 years of those clueless clowns to see PSOE supporters now moaning about how the Royal Family and the Catholic Church are financed. 8 years not long enough to address those burning issues?
4) Final option; As a sovereign default approaches, the IMF, European Comission and ECB turn up in Madrid and make Rajoy an offer he can't refuse. Then you'll see what real austerity is when Barroso, Van Rompuy, and Lagarde are running the show. Proper swingeing cuts, privatisation of national companies, a serious cull in the public sector. I honestly think we'd see civil war.
To lay the blame for all these cuts at the feet of PP and Rajoy is ridiculous. Do you think they had any idea of the full state of the finances when they took office? Rajoy has had to man up and I'm sure he's well aware of what much of the public think but someone's got to do something. As Maggie once famously said "The problem with socialism is that eventually you run out of other people's money" - that's precisely what's happened. I have no doubt Rajoy would rather be opening nice new airports and high speed rail lines but as we all know, those days are over and we have to start paying back the money. Personally I'd like to see the end of this town hall system, we're approx - 1000 people where I live and the town hall employs about 10 full time staff, it's absurd but it's the same all over the peninsular. There must be tens of thousands of funcionarios all over Spain that could be dispensed of and no-one would notice. I'd like to see high street banking nationalised and put an end to this parcelling up of junk debt and flogging it off as a AAA investments. High Street banks should look after our money, help us with big purchases at reasonable rates and pay savers a reasonable rate of interest, however they are frequently just cash cows for board members and shareholders and not working in the public interest at all.
For now option 3 is the route we're going, how long it will last I just can't say, indeed sentiment is changing across Europe, the Dutch and the French aren't happy, the Germans don't like the idea of permanent fiscal transfers to the poorer south, the Euro could quite literally fold overnight. Stock up on some tinned goods, bottle water and dry pasta!
As the Chinese proverb goes "May you live in interesting times."