EUROZONE: Why nobody believes the Spanish Inquisition.

Why the much vaunted stress-tests won’t tell us much about Spain.

Today’s Monday, so everything in the eurozone is OK, the stress tests are looking good, and Spain doesn’t exist.

Everything is OK, says Christine Lagarde of France, because there is a new strategy: austerity and growth. Mme. Lagrande is, you’ll remember, the lady who says that the next fiscal period will be better “because good results always follow bad ones”. But this is a tad too Zen as an analysis to cut it on the increasingly neurotic lending and currency markets. And Christine has yet to explain how people with no money thanks to austerity can kick-start growth with more spending.

The order of the day all over the EU now is smiling denial, and the subject guaranteed to get those bureaucratic dentures beaming is Spain.

“I am really confident about the medium and long-term prospects for the Spanish economy,” announced the IMF’s Dominique Strauss-Kahn as he emerged from a Madrid meeting recently. Hmm – so why were you there, Dom? Oh (or ‘Eoeurr’) said the IMF chief, it’s just routine. Must be why Herman Van Rompuy was there too – Herman gets in everywhere these days.

The need for a bailout is hotly denied by all of the players in Spain’s financial inquisition. This wasn’t credible from the outset, and it is a ludicrous position to defend now. But defend it they must, for the markets know that if Spain were to experience a real financial fiasco, the degree of cross-border exposure for banks based in the larger euro-area economies would be mind-boggling: banks in the eurozone have a £1.2 trillion exposure to Greece, Ireland, Portugal and Spain, of which £640 billion is exposure to Spain.

Hence the denial and the stress tests. But there’s just one problem with the stress test bollocks: Spain’s quasi-building societies (cajas) are not registered for it. This is like auditing Man United, and leaving out the Glazer family debts in the US; because these regional entities are half of Spain’s bank assets – and most of the property subprime is sitting in there.

The EU stress tests – especially the Spanish ones – are nowhere near so tough as those conducted in the UK and U.S.” said a Swiss-based credit manager over the weekend. “I think Zapatero just keeps getting his alibis blown, and inventing new ones. There’s no confidence in these denials any more.”

American finance guru Irwin Steltzer finally joined The Slog’s Greece Must Default club over the weekend. The Spanish crisis is of a different type, but far greater order of magnitude. Few if any of this column’s contacts think Spain will escape. And a majority in private think the euro is a basket case.