For the first time since the financial crisis began three years ago, “a European leader has done something intelligent and surprising”, says Wolfgang Münchau in the FT. Spanish prime minister Jose Luis Zapatero’s intention to publish stress tests of its banks has “bounced” the EU into following his lead. Stress tests on the eurozone’s 26 biggest banks are due to be published by the end of July.
In recent weeks interbank markets in Europe have seized up. Investors know some banks’ balance sheets are highly exposed to dodgy European government and private debt. But they don’t have enough information to be sure which ones are “the walking dead”, says Marco Annunziata of UniCredit. So the hope is that publishing the test results will restore confidence in the system, as last year’s stress tests and recapitalisations of US banks helped to do.
However, the current plan does not go far enough. We will get a glimpse at the biggest banks but not at Germany’s regional banks, “the biggest financial toxic waste dumps on earth”, says Münchau. The government can’t force them to recapitalise because state governments control them. Then there’s the question of how rigorous the tests will be. A key requirement to allay market fears is that they include the threat of a sovereign default, says Icap’s Don Smith.
If the tests are perceived as a “weak fudge” and the banks still need capital, governments may well have to pump in scarce public-sector cash, says Robert Peston on bbc.co.uk. That could reignite fears over sovereign debt loads. The stress tests, says Peston, will be a “fraught exercise”.