Default Tightrope
Greece’s future – and indeed the future of the Eurozone – continues to hang in the balance after stress tests carried out by the European Banking Authority (EBA) raised more questions than answers.
The European financial community waited with bated breath for the results of the EBA’s bank stress tests, released on Friday, but the results fell short of expectations, failing to factor in potential sovereign default and the impact this would have on the European banks.
The tests showed that eight out of 90 banks failed and had an aggregate capital funding gap of €2.5 bn.
But with the worst-case scenario not plotted on the EBA’s forecast, analysts at investment banks and investment management firms claim that the tests did nothing to bolster sentiment across Europe and failed to clear the fog around Greece’s future.
Despite their shortcomings, the tests did provide a snapshot of the European banking industry.
Some countries came out smelling of roses. For example, all of the UK’s major banks were found to have appropriate levels of capital in reserve.
Even Spain and Italy performed well, mainly on the back of the strength found in groups like BBVA, Santander and Intesa Sanpaolo.
But despite the fact that Italy’s major banks seem to be well capitalised, some market observers believe Italy is a potential candidate for financial rescue this year.
This sentiment does not bode well for Banca d’Italia governor Mario Draghi, who is taking over at the European Central Bank.
One of the positive outcomes of the stress tests was the forced disclosure by banks of their sovereign debt holdings, on a country-by-country basis.
The disclosure caused chaos among European stocks, the Stoxx Europe 600 Index experiencing its biggest weekly sell off in four months, as investors were scared off by the prospect of more capital raising.
While European investors’ confidence had risen earlier this month, it will now likely take a hit as this stress test exercise failed to hit the mark.
One Comment on “Default Tightrope”
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GuerillaBanker says:
Good article, thanks!
I wonder to what extent the non-factoring of the sovereign debt risks may make the markets see these results as confirmation of desperation on the part of Europe and hence the actual underlying weakness in the European banking system rather than any confirmation of strength. The coming day will be of interest!