Europe to make public results of bank stress tests

Europe faces another moment of truth in its simmering debt crisis on Friday as regulators release the results of “stress tests” on 91 banks across the continent, an exercise that some fear could fail to credibly answer markets’ questions.

The hope is that the operation, like stress tests carried out on 19 U.S. banks a year ago, will help shore up confidence. In that exercise, 10 banks were told to raise about $75 billion in extra capital.

But the sprawling European tests come with potential risks — particularly as little is known about how the London-based Committee of European Banking Supervisors (CEBS), which will release the overall results, is conducting its analysis.

Experts fear that bad news could badly hurt markets again, while too rosy a picture may prompt investors to think the tests weren’t rigorous enough.

Marco Annunziata, chief economist at UniCredit Group in London, faulted “the recalcitrant and rather secretive way in which (the exercise) has been prepared.”

“The silver lining, however, is that this should have served as pragmatic expectation management: very few investors now expect the European stress tests to provide a silver bullet,” he added. “The scope for disappointment should therefore have been reduced.”

Europe’s debt crisis has already forced Greece to take a euro110 billion ($140 billion) international bailout to avoid bankruptcy, and pushed governments to put up a euro750 billion backstop for troubled governments if they need it.

Greece’s near-failure sent shivers of fear through investors wondering which banks’ balance sheets were hiding Greek and other debt that could go bad.

Most of the 91 banks tested are expected to pass — but analysts say some must fail for the tests to have any credibility. Failure won’t necessarily mean the banks are bust, but that they will need to raise money from investors or governments.

The list of banks includes several from Greece and Portugal, and experts’ eyes will be on some of the smaller Spanish banks — the so-called cajas — that were badly hit by the real estate collapse. Also included are regional German banks, the Landesbanken, which made oversized bets on global financial markets before the 2008 meltdown.

What is known is that the CEBS’s “adverse economic scenario” assumes the EU economy underperforms the EU Commission’s forecasts by three percentage points of gross domestic output — in other words, a recession. In May, the Commission predicted that the EU economy would grow by 1 percent this year and 1.7 percent in 2011.

The key unknown is what potential losses the CEBS assumes banks will have to absorb from losses on their investments in government debt.

German Chancellor Angela Merkel noted Wednesday that the tests come in an environment in which leaders already have agreed on the Greek and eurozone bailouts.

“I think that, measured by the real situation, the conditions for these stress tests are very realistic,” Merkel said.

Source: AP

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