Europe bank stress tests seen as too weak
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The findings of the tests – along with whatever details officials choose to disclose about the criteria and procedures used – will be presented on July 23.
Meanwhile, details from official and unofficial sources about the stress tests have surfaced. Reportedly, 91 banks will be subjected to these tests. The stress scenario involves a 2-year period in which GDP growth for the EU is 3 percentage points lower than the European Commission's official forecast. The tests also includes sovereign risk shock, which reportedly assumes a 17 percent loss on Greek government debt, 3 percent for Spanish debt, and none for German debt.
Many members of the market and the media, however, believe that these reported criteria for GDP contraction and sovereign risk shock may be too lenient to be credible and useful.
During a press conference on Thursday, European Central Bank chief Jean-Claude Trichet was peppered with questions from journalists about the details of the bank stress tests and on how a troubled bank exposed by these tests may be re-capitalized.
One journalist asked if Trichet can deny or confirm the assumption of 17 percent loss for Greek bonds and 3 percent loss for Spanish bonds, and then asked that “if this is true, isn't it too mild for a stress test?”
Another journalist remarked that “the consensus view from the markets seems to be...that the stress tests are not going to be robust enough to restore confidence in the European banking system.”
Trichet was evasive about this subject and did not give any substantive responses.
Marie Diron of Oxford Economics agreed that from the details so far, the stress tests seem too favorable.
“Experience tells us that in case of debt restructuring, the haircuts are likely to be much larger than 17 percent, let alone 3 percent,” she said.
She also remarked that in 2008/2009, the actual GDP growth for the euro zone was roughly 7 percentage point below forecasts, which is a lot more than the 3 percentage points currently proposed.
Diron added that another major source of concern is the fact that officials have not really explained how they will deal with banks that fail the test.
She concluded by saying that “a banking crisis or serious problems in the banking sector [are some] of the main sources of risk to the eurozone economy.”
source ibtimes.com
Sep 8, 2010 - 03:33
