The pressure is building in the European financial markets as we’re heading into one of the most uncertain weeks in a long time. The big deal is Friday’s publication of the results of the EU regulators stress test of 91 major European banks. There’s a lot of questions marks in connection with the test, related to the methods, the results and the publication.
“There are 91 banks being tested at the moment, I don’t think there will be 91 at the end.”
As the debate over the credibility of Europe’s banking sector stress tests continues to rage, analysts says EU’s refusal to openly discuss a framework for national debt restructuring has placed the bloc’s politicians in an intractable bind, and that some banks might not survive the process.
With results from the tests set to be published the coming Friday, concern is centered on whether market participants will consider the criteria used to assess the firms’ weaknesses as sufficiently enough, or merely a political whitewashing stunt.
Personally, I was very skeptical of the last test, and I can assure you that I’m not less skeptical to this one.
Name Your Price
Weighting the reduced value of the huge stockpile of sovereign euro zone bonds held by the 91 banks under examination is proving especially contentious.
Some reports suggest that the value of Greek bonds will be marked down by 17% and Spanish bonds by 10 – 11 percent.
But there are also experts who thinks a markdown closer to 50% would be more reasonable.
Anyway – Greek, Spanish and several other countries bonds are just as easy to value as Chinese CWMPs (Credit-backed Wealth Management Products).
It doesn’t make it any easier that the Committee of National Supervisors, carrying out the tests, is restricted by member states‘ current dialogue on national debt restructuring.
Germany supports the creation a European framework to manage future debt restructurings in an orderly way, but other member states have come out against the idea.
“A higher haircut would be an admission that a sovereign debt restructuring may be needed,” says Nicolas Veron, a researcher at the Brussels-based Bruegel think-tank. “They are bound by this.”
He suggests that no haircut be applied to the sovereign bonds as part of the tests, but instead that banks should provide a maximum amount of information to investors on what bonds they hold, allowing them to make the decision.
In your dreams…..
Be Prepared For Trouble
Any question mark over the veracity of the upcoming test results could spell another bout of instability for the EU.
“If the market is not convinced then we are in for trouble,” says Rym Ayadi, a researcher with the Centre for European Policy Studies, another Brussels-based think-tank.
Ms. Ayadi believes that the publication of the results will lead to a significant reduction in the number of European banks on the ground, as weaker firms become the target of takeover deals.
“There are 91 banks being tested at the moment, I don’t think there will be 91 at the end,” she says.
I believe she’s right.
Despite the potential takeovers and efforts of banking executives to raise extra capital from the private sector, large capital injections from governments are likely to be needed to shore up a number of the firms diagnosed as being vulnerable.
“I expect most of the recapitalization of Spanish regional lenders and the German state-owned Landesbanken will be done from state funds,” says Deutsche Bank‘s chief economist Thomas Mayer.
This in turn will place an additional strain on already over-stretched national coffers, he adds.
However, EU officials have already indicated that governments will have recourse to components of the euro zone’s €750 bail-out mechanism, if needed.
The problem is, thou – who’ll put the real money on the table if that should be necessary?
The German government?
Related by the Econotwist:
Related articles by Zemanta
- News Analysis: Europe Struggles to Match Success of U.S. Bank Tests (nytimes.com)
- You: Bank stress tests to shed light on Europe’s economic health (washingtonpost.com)
- WRAPUP 3-EU agrees key criteria for testing health of banks (reuters.com)
- EU Ministers Pressured to Give More Stress Test Data (businessweek.com)
- EU tests aimed at restoring confidence in banks (theglobeandmail.com)