Latest: cost of insuring Spanish debt rises in pre-auction trading

While Britain’s tabloids spent yesterday agonising about the snub to the Queen by Spain over the nationality of the Rock of Gibraltar, Spain’s banking system continued to look very rocky indeed.

Most eyes are this morning on the €2.3bn bond auction about to get under way in the context of Greek meltdown and spiking yields on Clubmed sovereign debt paper, but the contact I use most often in Madrid sees the banking issue (while in no way a separate one) as considerably more urgent.

The rumours of imminent Brussels/Frankfurt action to get a reliable steer on the numbers involved were confirmed yesteray as both the ECB and the EU Commission forced the appointment of independent auditors Blackrock and Oliver Wyman. As The Slog has been opining for months now, the stats pushed out by Spain rarely reflect the real horros going on in (a) the Spanish banking system per se and (b) its relationship with local government and the construction busines.

Last week I posted about ‘irregularities’ inside Bankia, and it’s immediately clear in the aftermath of this that neither Olli Rehn nor Mario Draghi want a repeat of the fiasco whereby Deloittes refused to sign off Bankia’s accounts.

The have just thirty days to assess and report upon potentially yawning gap between the book value of Spanish loans, and their realistic value today.

“Many of us here are wondering whether even such an independent report could be fully frank in public,” says my key contact there, “the truth would probably scare off any bondholders still left taking the Spanish system seriously.”

According to Spain’s central bank, banks in the country have borrowed something like €316 billion under the ECB’s LTRO scheme, but by their very nature, such Draghi scams encourage the line of least resistance: playing safe rather than pouring liquidity into the economy. None of this is rocket science; during the mad years, Spanish cajas especially lent far more than they took in from depositors. And despite what ‘Legs’ Diamond thinks, that breaks Rule One in any savings-and-loan institution.

Whatever the final figures are, this is simply more window-dressing by the European Commission: the independent audit is hardly going to vindicate what is a complete crock that – along with the sovereign debt – is far too big for the EU in general or Berlin in particular to fix. This is reflected in the fact that the cost of insuring Spanish debt against default went higher in early trading today (Thursday) even before the auction got going.

The conundrum leaves Merkel and her commitment to the eurozone in general (and austerity in particular) ever more isolate among both among her own electorate….and the Frankfurt banking community. More news on this, hopefully, within the next two hours.