Spain, which was never going to need a ‘bad bank’ is in talks to assemble one.

The “bad bank” scheme is the latest attempt by the centre-right government of Spanish PM Mariano Rajoy, to avoid a Troika-style rescue. This rescue is that last remaining thing that Spain was never going to have that hasn’t already been had. So the end is getting nearer. 

Rajoy’s Popular Party – give him his due, it’s a great name – has deepened fiscal austerity, reformed Spain’s labour market, and ordered banks to set aside an extra €54bn of bad loan provisions and capital buffers this year. But the banks have now somewhat sheepishly come back to say that’s about a third of what they need. That’s worrying, because translating bankspeak into English, it probably means it’s about 5% of what they need.

Events today have already made thing worse for Spanish bond sales: Standard & Poor’s (S&P) Ratings Services just announced it is lowering the credit rating of 16 Spanish banks  most importantly, those of Santander, and its vital subsidiary Banco Espanol de Credito. They’ve been downgraded from A- to A-2 and A+ to A-1 respectively.

But when the markets are in a mood to think the best of a disaster, it’s amazing how much excrement you can chuck at them before they decide it tastes bad. Spain’s statistics bureau said last Friday that the country’s jobless rate rose to 24.4% in the first quarter, from 22.9% in the fourth quarter of last year; but because the recession forecast was pessimistic by 0.1%, European stocks rose.

It doesn’t take a lot to get European stocks rising these days. Thanks to all that QE and Zirp, large concerns and their bankers can buy their own shares if necessary. But 0.1% in one country about to topple over a cliff is the best bippy so far in terms of a crazy rationale for confidence. I hear there’s a donkey auction on Spetse tomorrow. Stand by for a bull market on the main Greek bourses of they sell two hind legs more than expected.