–Results Of Stress Tests Of 91 EU Banks Due Friday 23 July
–EU Sources Say Results Likely Published After Market Close

By Emma Charlton

BRUSSELS (MNI) – As European policymakers prepare to unveil the
results of bank sector stress tests, speculation is mounting about which
banks are likely to fail and whether the market will consider the tests
stringent enough.

The London-based Committee of Banking Supervisors, or CEBS, is
currently testing 91 European Union banks, which together account for
65% of all EU banking assets. It is set to release the results July 23.

But scant details about the methodology being used and the way in
which the results will be released threaten to undermine the tests’
credibility.

Several EU sources said the lack of information was due to
disagreement among governments over how much detail should be released,
the haircut level that should be applied to the sovereign debt of
different countries, and how long each of the failing banks should have
to raise any capital that might be deemed necessary.

The discount applied to sovereign debt is key to the process
because Europe’s banks have a large exposure to EU sovereign debt and
many market participants fear a default in some high debt and deficit
countries, particularly Greece.

Late last week, the BBC reported London-based banking sources
saying that the tests currently envisaged a writedown of around 17% on
Greek government bonds, 10% to 11% on Spanish sovereign debt, 6% on
French securities, and 4% to 5% on German paper.

Other reports suggest that Greek debt could be written down by 23%,
but whether this will satisfy the markets remains to be seen.

In fact, the haircut details might not be released at all.

The decision to publish the results of the tests, intended to
ascertain whether Europe’s biggest banks have enough capital in reserve
to withstand a recession or more market turbulence, was taken last month
as policymakers bowed to market pressure in a bid to restore confidence
in EU banks.

The final decision on how much information to publish and when to
publish it will come after a teleconference of finance ministers,
scheduled to take place on July 22, EU sources said.

One EU official said the current plan is to release the test
results after European markets close on July 23, in order to allow any
issues raised to be digested over the weekend.

The main problems – the same source said – are expected in Spain,
Germany and Greece.

Non-listed banks in Spain and Germany are likely to be the focus of
the test results, since Spain’s cajas and Germany’s Landesbanks are
thought to be short on capital.

Greek banks are of concern because they have a lot of exposure to
Greek sovereign debt, which is considered the riskiest.

In advance of the test results, Europe’s policymakers have lined up
to reassure investors that their banks will pass the tests. Luxembourg
Prime Minister Jean-Claude Juncker, who also heads the Eurogroup club of
Euro-using nations, told an Austrian national newspaper that he didn’t
expect any “big catastrophes.”

Others are keen to spread a similar message.

“My feeling is that things will go smoothly for the six Greek banks
included in the sample,” George Provopoulos, governor of the Bank of
Greece, said in an interview published in Greek newspaper Imerisia over
the weekend.

Irish and UK policymakers have been quick to point out that their
banks have already passed domestic stress tests more severe than the EU
tests.

In the lead up to Friday’s announcement, there are still many
unknowns, with some economists saying the tests will be enough to
restore confidence and others saying they could backfire.

“The assumptions behind the stress test appear increasingly
credible and the remaining question concerns the recapitalisation funds
that may need to be made available,” economists at BNP Paribas said in a
note to investors.

But they warned that any market optimism could be short lived.

“We believe that the euro’s recent recovery is coming to an end as
optimism regarding European rescue packages and stress tests starts to
fade,” they wrote.

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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