As much as this blog was a persistent critic of the US version of the stress tests, I must hand it to the folks at the Treasury: they did an impressive job of dressing up and selling a garbage barge. The combination of consistent cheerleading, extend and pretend, and a few short squeezes did wonders for bank stock prices.
The European version, like most movie sequels, was a shameless rehash that relied overmuch on franchise value. The European authorities really seemed to believe that “stress test” was a magical invocation that would strike terror in the heart of market demons and Euroskeptics. And the rally in the euro and the retreat of Euroworries from front page news would seem to support their belief (although good economic reports out of Germany were probably an even bigger confidence-booster).
But the European stress tests looked to be a Potemkin process. The tests were wrapped up with remarkable speed, the sovereign debt loss assumptions were laughably low, many other elements of the test were not made public, and, as in Lake Woebegone, (almost) all the children were above average.
Not surprisingly, the tests have failed to quell doubts. The Financial Times reports:
Leading UK and continental European companies are increasingly shunning banks from Spain, Italy and even Germany because they do not believe the Europe-wide stress testing of banks gave a true picture of their financial health.
Corporate treasurers from groups with revenues of more than $240bn told the Financial Times they were conducting their own tests to gauge for themselves banks’ robustness…
“There is an element of whether the emperor has any clothes on and what to do if he doesn’t. The stress tests were a joke,” said the treasurer of a large European media company…
Treasurers are now also paying close attention to credit default swaps – the price of protection against a bank defaulting on its debt – as well as to share prices…Companies said they regularly adjusted the limits on how much risk they would take on any one bank via cash deposits, derivative contracts or loans.
A treasurer at a FTSE 100 company in the UK said: “We have no business with Spanish banks and a couple of Italian and German banks. If US banks are refusing to deal with these guys, then why should we?”
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The EU stress test served its purpose to provide European leaders with a relatively calm vacation period. During August and the first days in September, it was the nudity of the recovering U.S. emperor that came into focus instead of the disintegrating euro.
Should the coming weeks and months see rapid deterioration in parallel of both the EU and the U.S. macro situations, it would be interesting to see to what degree those partially overlapping and partially separate situations will cause to push each other further down:
http://globaleconomydoesmatter.blogspot.com/2010/09/odd-couple.html
BS. Spanish banks were cut off from external financing for several weeks, which led to Spain threatening to publish its own stress tests and let investors decide for themselves why German and French banks weren’t releasing theirs.
Once released, Spanish banks are getting external financing as usual. E.g. they’re selling bonds, which they couldn’t before the stress tests. The siege is over.
By the way, US public debt to GDP is around 120%, according to Rogoff. That’s twice the Spanish ratio. Don’t you think the sovereign debt loss assumptions were even ridiculously lower (namely, zero) for the US stress tests?
Source: Rogoff, http://www.project-syndicate.org/commentary/rogoff72/English
Diego,
You might find this interesting:
http://globaleconomydoesmatter.blogspot.com/2010/08/on-shoulders-of-giants-how-spain-is.html
Swedish Lex,
thanks for the link. I had already read it, though.
Edward Hugh’s analyses seem too simplistic to me as of late. He puts some graphics from Germany, then some from Spain, and he concludes that, since they look similar, Spain will follow Germany’s steps.
OK. Just, it’s pretty unscientific. Kind of astrology. The fact that two graphs look similar tell us… absolutely nothing certain about the future.
I mean, you look at Japan in the 90s and house prices fell, deflation set in. OK. That disproves the (anyway unfounded) claim that house prices never fall, or consumer prices never fall. But you cannot infer that house prices will always fall after a bubble, or that consumer prices will always fall in the face of mass unemployment.
There’s too much overconcluding these days.
Diego, I don’t think that the current revival in issuance by Spanish Banks has a lot to do with the stress tests. Bond and unsecured wholesale deposit markets are different. Bonds can be repo-ed or refinanced at the ECB, Deposits or CD, as used by corporate treasurers, cannot.
Both exchange repo and ECB refinancing registered a surge in activity this summer, especially on the repo side where the european clearing houses started to take Spanish Govys as collateral.
This is more a case of Eurocrats at the ECB doubling down on spanish refinancing, without any accountability of course… Yves already warned us that Clearing Houses are the next in line for a SHTF / TBTF event , and it could perfectly happen in Europe…
Lex,
re: Edward Hugh posts: thanks