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Friday, 7 October 2011

The first two stress tests for European Banks might have been rigged, but now we are ready to find the real truth …, with another stress test.

In the US, there is the beautiful proverb: ‘Fool me once, shame on you. Fool me twice, shame on me’.

But the European Union has clearly not heard of this proverb. The EU thinks it can fool people for a third time too…, with another stress test for the banks. And this one is going to tell the truth…, the whole truth… and nothing but the truth.


Everybody in their right minds knew that the first two stress tests have been rigged. The circumstances and test scenarios that could point out the real pitfalls in the financial situation of the banks, were deliberately left out:
·     No substantial haircuts on sovereign bonds of Greece (the pathetic 16% haircut on Greek bonds of the second stress test was a real laugh), Spain, Portugal and Italy;
·     No (uncontrolled) defaults of (one of) these countries in the Euro zone;
·     No substantial write-downs on the Commercial and Residential Real Estate portfolios of the banks.
·     No substantial write-downs on other asset categories that were widely in possession of the banks.

The results of these chicken-shit stress tests should have been that the European banks were trusted again by their competitors, their investors and savers, as being solid, trustworthy, well-financed institutions. Exactly the opposite happened.

The biggest and most amazing result of the second stress test was that some Spanish banks actually failed it. And Dexia, the Belgian-French bank that will be put under custody of the Belgian and French governments this weekend? It passed the second stress test ‘with flying colors’.

So you would expect that no government official would dare to bring back the topic of stress tests for banks, at risk of being the laughing stock of the EU.

But no: EU officials of the European Banking Authority think of another stress test for the banks. And this one is going to tell the whole truth on the financial situation of the banks. The scenario will incorporate substantial write-downs on sovereign debt of the peripheral countries.

The business newspaper Financial Times ( writes on this story. Here are the pertinent snips:

Europe’s top banking regulator has started to re-examine the strength of the region’s banks, modelling a big writedown of all peripheral eurozone sovereign debt.

The exercise, conducted by the European Banking Authority, could potentially identify capital shortfalls across the banking system of as much as €200bn ($266bn).

The EBA, which is mid-way through a two-day crisis board meeting designed to assess the potential hit of mass sovereign restructurings, will use market values, to set “haircuts” on banks’ sovereign holdings.

The regulator is also closely involved in talks with European officials and governments over mechanisms that could be used to forcibly recapitalise banks, enabling them to cope with sovereign defaults.

The move, a tacit admission that the European Banking Authority’s two previous rounds of bank stress tests were not sufficiently robust, came as Angela Merkel, the German chancellor, said she was prepared to recapitalise her country’s banks if necessary. She suggested she wanted to discuss joint EU-wide bank support efforts at an EU summit in two weeks.

“We’re under the pressure of time and I think we need to take a decision quickly,” Ms Merkel said after meetings with the European Commission in Brussels.

The officials insisted the move was not an indication that EU leaders were preparing for a Greek default. Instead, they said it was a precautionary measure intended to inform rapidly accelerating negotiations on EU-wide bank recapitalisations.

The primary hold-out appeared to be France. Despite Paris’s ongoing efforts to rescue Dexia, the troubled Franco-Belgian bank, the French government signalled it was uncomfortable with the accelerating talk of recapitalisation, insisting its banks did not need help.

“French banks do not need more capital than they have decided to accumulate by 2013,” one French official said.

The top three French banks, BNP Paribas, Société Générale and Credit Agricole, all own huge stocks of debt issued by struggling eurozone peripheral countries like Italy, Greece and Spain and have come under intense pressure from financial markets. All three have committed to reach minimum core capital levels set under the Basel III regulatory regime by 2013, six years ahead of the official deadline.

This whole story is an absolute must-read, so I advice you to click on the link.

Now concerning the first red and bold statement. This is a blatant lie and everybody knows this. Because, when the government leaders of the EU would not be preparing for a Greek default, they would be ignorant fools. And that is something I hardly can believe.

And rather sooner than later, the second red and bold statement on the capitalization will also be disclosed as a blatant lie. Dexia is already in dire straits and the three mentioned banks CA, SG and BNP have major financial issues with their vast investments in the peripheral countries.

The slightest future problem with Spain or Italy will further vaporize the value of the sovereign, bank and corporate bonds from the peripheral countries that these banks own. And then the French government will pay dearly to save these banks, as no investor will buy their shares and their bonds.

And concerning this new EBA stress test: Even if this is truly ‘the mother of all stress tests’ and even if it discloses the whole truth on the financial situation of the large European banks, the credibility of the concept ‘stress test’ had already gone after the first stress test.

Also, even if this new stress test would give full disclosure on the financial health of the large EU banks, and the results would be bad (they would IMO), it would lead to panic on the financial markets and bank-runs at these banks. This is something that the authorities want to prevent at all costs.

So my prediction is: either the results of this new stress test will be rigged again like the two times before, or these won’t be published. The latter would be in itself a tell-tale signal.

Fool me three times?? No way.

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