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E U Crisis Over As Banks Set To Pass Stress Tests

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No catastrophes from stress tests seen - Juncker
8:25, Friday 16 July 2010
) - Stress tests on European banks should not reveal any "catastrophes" but the reviews should be tough, the chairman of euro zone finance ministers, Jean-Claude Juncker, was quoted as saying.
"I am not expecting any big catastrophes," he told Austrian newspaper Kurier. "But there cannot be any glossing over, the tests are based on reality," he said in an interview published on Friday.
The results of the stress tests will be released on July 23 and cover 91 banks.

Looks like the very strict tests will all be passed, maybe a token bank will be borderline so as not to present too much on the optimistic side.

Does anyone seriously believe the foregone conclusions set out so far will be taken on board by the markets as being credible?

On the other hand the bankers can hardly cause panic by failing the tests.

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I suspect the test consisted of each head banker being taken to a small dark room, where he's sat down at a table and a cake with a lit candle is placed in front of him. If he can blow the candle out his bank passes the test. And he gets to eat the cake.

Well I know it'll involve bankers having and eating their cake ....

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There's a great deal of talk about whether eurozone taxpayers will have to bail out their banks, when we have the results on 23 July of tests by regulators to assess their respective weaknesses.

But this is to ignore that only a few weeks ago there was an initial billion dollar bailout of European banks.

You may have missed it, because it wasn't called a bank rescue programme.

It was a financial support package for Greece worth 110bn euros - and 750bn euros of credit for other eurozone governments that may face difficulty keeping up the payments on their debts.

On the face of it therefore this was aid for eurozone states.

But in practice it was succour for German banks, Spanish banks, French banks and so on, because it is those banks that lent hundreds of billions of euros to the likes of Greece, Spain, Portugal and Ireland - and if those countries were unable to keep up the payments on their so-called sovereign debts, well the immediate pain would be felt by banks which had lent to them.

What is troubling, however, is that the creditors of Europe's big banks fear that the billion dollar rescue package wasn't enough - that some eurozone banks face substantial losses and that they have too little capital to absorb those losses.

It is not just that these banks are perceived to have lent too much to governments - like that of Greece - which have been living beyond their means.

They've also provided too much finance to property developers and home-owners in markets - such as those in Spain and Ireland - that have gone from boom to bust.

And there's a final cause for concern among those who provide vital credit to banks. What they see in the eurozone are arrogant lenders which characterised the banking crisis of 2008 as primarily the fault of American and British banks - and which therefore did not follow the lead of American and British banks in strengthening themselves by raising vast amounts of new capital.

The statistics that are available would tend to support these fears about the relative weakness of the eurozone's financial sector.

That said finance ministers and government heads insist that the anxieties are exaggerated.

They've asked regulators to examine 91 European banks and adjudicate on whether they have sufficient capital resources to insulate them from a possible return to recession and squalls in markets.

These so-called stress tests on banks must surely be a jolly good idea - if, that is, they reassure banks' creditors that the risk of lethal losses materialising in eurozone banks is minimal.

Except for one thing.

There is a widespread view that the simulated stresses imposed on the banks are too feeble - they're the equivalent of seeing whether an aeroplane is airworthy by flying it only in choppy weather, not a tornado.

If the eurozone's banks pass their stress tests only because the tests are unrealistically easy, then those banks will remain acutely vulnerable to the ebbs and flows of confidence and sentiment among those who lend to them.

Or to put it another way, stress tests that lack credibility could be the mother and father of a new banking crisis, with the fault-line running from Madrid, to Paris to Berlin - rather than - as happened last time - from New York to London.

I think initially the results will be viewed positively, then slowly the tests will be shown to be utter crap and then the panic will set in.

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