The outcome of the stress tests conducted by the Committee of European Bank Supervisors (CEBS) showed that five Spanish banks, one German bank, and one Greek bank didn’t make the cut. Well, that’s not so bad considering how analysts expected around ten banks to fail the tests. Besides, these banks will probably only need 3.5 billion EUR in additional funding, which is much less than the projected 30-90 billion EUR shortfall.
The rest of the European banks received thumbs-up signs from the authorities, confirming that they all have enough rainy day funds to survive a possible financial crisis. I can just hear ECB President Trichet saying “Hah! I told you so! Take that suckas!”
But wait, a cute forex detective senses something fishy about the results!
According to the press conference that followed after the release of the results, the CEBS did not test for a sovereign default event. The CEBS believes that this scenario will not happen, so there really is no reason to include it in its methodology.
This came to a surprise to everyone because the possibility of a sovereign debt default was the primary reason investors shied away from euro zone assets. Although the methodology of the stress tests were similar to that in the US, the exclusion of a sovereign debt default scenario instantly caused investors to doubt the reliability of the stress tests. It was too easy they say, as more than 90% of the banks tested passed.
Clearly, there is still a ton of uncertainty lurking about. Many feel that the committee who conducted the stress tests is much less credible than the one that did the US version. I guess we can blame all the bad news from Greece and Spain for this sour mood!
Still, there are some positive things that came out from the tests. Wouldn’t hurt to look at the silver lining, right?
First, according to the CEBS, the tests were in fact stricter than those of the US. The reason why they didn’t’ account for any potential defaults is because they don’t believe it’ll happen. Quite frankly, I don’t blame them! Do you really expect European officials to say that they expect Greek or Spanish debt to default? Of course not! They are supposed to express confidence in their economies, and that’s exactly what they did.
Secondly, there must be optimism in the fact that no big banks are expected to fail. Furthermore, out of those banks that did fail, most of them were weaksauce to begin with. Take note that most of those banks are located in Spain and that their government is already skipping siesta time to come up with plans in case of any shortfalls.
Thirdly, for those questioning the credibility of the CEBS, the results of their stress tests are pretty much in line with those of Moody’s credit ratings agency. Similar to the CEBS results, Moody’s expects that most banks will be able to survive even the worst economic conditions.
Even though risk sentiment is shaky, there are still some things to smile about. Once these bright spots start to sink in, we may see risk appetite grumble even louder.