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Europe Stress Tests May Underestimate Probable Losses

• Bloomberg

European stress tests on 91 of the region’s biggest banks drew criticism from analysts who said regulators are underestimating probable losses on Greek and Spanish government bonds.

The tests are designed to assess how banks will be able to absorb losses on loans and government bonds, the Committee of European Banking Supervisors said yesterday. Regulators have told lenders the tests may assume a loss of about 17 percent on Greek government debt, 3 percent on Spanish bonds and none on German debt, said two people briefed on the talks who declined to be identified because the details are private.

“This isn’t a stress test,” said Jaap Meijer, a London- based analyst at Evolution Securities Ltd. It’s “merely the current valuation of government bonds.”

Credit markets are pricing in losses of about 60 percent on Greek bonds should the government default, more than three times the level said to be assumed by CEBS. Derivatives known as recovery swaps are trading at rates that imply investors would get back about 40 percent in a Greek default or restructuring.

“I wonder how much these stress tests are reverse- engineered to inspire confidence in the market” and banks, said Bruce Packard, an analyst at Seymour Pierce Ltd. in London. “If they are too aggressive, everyone fails.”

Stocks Rally

The 54-member Bloomberg Europe Banks and Financial Services Index increased 1.5 percent today, bringing this week’s gain to 8.4 percent. Royal Bank of Scotland Group Plc rose 3.7 percent to 44.42 pence as of 8:44 a.m. in London trading. Paris-based BNP Paribas SA climbed 3 percent to 49.43 euros and Dexia SA, the largest lender to local government in France and Belgium, rose 3.5 percent to 3.17 euros.

Lenders that account for 65 percent of the EU banking industry will be tested, including 14 German banks, 27 Spanish savings banks, six Greek banks, five Italian banks, four French banks and four British banks, CEBS said in a statement.

EU regulators are relying on the stress tests to restore public confidence in banks amid concern that some lenders don’t have enough capital to withstand a default by a European country. A stress test of U.S. banks last May spurred a rally that lifted the Standard & Poor’s Financials Index 36 percent in the following seven months.

“I think they are letting the banks off lightly,” said Stephen Pope, London-based chief global equity strategist at Cantor Fitzgerald. “This sounds like the softest option possible.” Regulators should be applying a 20 percent haircut on Greek bonds and 7 percent on Spanish debt, he said.

Angela Merkel

A CEBS spokeswoman in London declined to comment on the discussions. The EU will disclose the results of the tests, showing how individual banks would hold up to economic and market shocks, on July 23, German Chancellor Angela Merkel said yesterday. Policy makers haven’t decided how much detail to disclose.


4 Comments in Response to

Comment by Die Daily
Entered on:

It's OK Oyote, you didn't OWN it, did you? If you had owned it then you would have been responsible for it. So I guess you're fully covered.

Comment by Found Zero
Entered on:

OH GREAT! The freaking pony died because YOU DIDN'T GIVE ME ANY FOOD FOR IT!


You evil, vile, hateful, spiteful and vindictive conservatives, you KNEW this was gonna happen and you CHOSE NOT TO TELL ME. It's on record. When we wisely and righteously liberated this pony from your evil capaitalistic clutches, we distinctly asked you what it ate. And you kept your mouth shut.

Well now we got a dead pony on our hands. It's what us liberal intellectuals call a "zero sum game". See now neither of us have a pony and it's YOUR FREAKING FAULT.

Now give us another pony. With food this time.

Comment by Found Zero
Entered on:

OK fine, you wanna be like that? I'll just take one of your ponies. There. See how it makes you feel. My pony now. Me and my pony, we're outa here.

Hey what does this thing eat anyway?

Comment by Found Zero
Entered on:

BWA! Balderdash! I'm getting all KRUGMAN on your asses now. This whole business of "mark to market" is just people out to ruin Obama's recovery plan. All the stress is from conservative wingnut wacko tinfoil hats like you people. If you didn't exist we could fully fund public unions and everybody gets a pony.


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