FRANKFURT (MNI) – The Eurozone recovery remains on track and
businesses unfazed by market jitters ahead of banking stress test
publication.

While latest data surprised on the upside, easing concerns over a
double-dip, the upcoming release of bank stress tests results appears to
bear more downside risks.

Eurozone industry orders rose far more than expected in May, with
strong gains across the board lead by capital goods and consumer
non-durables, Eurostat reported Thursday. Taking into account the mostly
downward revisions for previous months, the 3.8% surge in May left
orders 22.7% higher on the year.

July PMIs, also released Thursday, suggested that the recovery is
continuing and that at least for now fears of a double-dip recession
appear unfounded.

The composite PMI unexpectedly rose to 56.7 from 56.0. Most
analysts had forecast a decline. The increase reflected improvements in
both manufacturing (56.5 after 55.6) and services (56.0 after 55.5)

The PMI estimates did not include results for the peripheral
economies in the Eurozone, but the strong pick-up in German and French
numbers may signal much weaker indices in the those countries, where
austerity measures may weigh on growth and confidence.

Still, the data should have surprised most observers on the upside.

Financial markets, on the other hand, appear far less confident,
with fears of bad news helping to drive interbank rates to a fresh
11-month high. The three-month Euribor rate rose from 0.881% on
Wednesday to 0.884%, the highest level since mid-August.

Policy-makers, including ECB President Jean-Claude Trichet, are
optimistic that publication of stress results will help restore
confidence and have dismissed criticism that tests are too soft to be
credibility.

“These stress tests that we are doing are very serious; they are
based on very strict assumptions, so I think the results of these tests
have to be taken quite seriously,” Governing Council member Ewald
Nowotny said earlier this week. “We think that markets will react
positively to these stress tests.”

Most market observers, however, appear unconvinced that Friday will
bring a thunderstorm that clears the air once and for all. Rumours
ahead of the publication of test results at 16:00 GMT — including the
latest speculation relating to a possibility of bringing publication
forward — have not added to confidence.

EU sources said the lack of information and coordination was due to
disagreement among governments on how and when to release which results
and how much time the weak banks should be given to raise the capital
deemed necessary.

The clumsy communication, lack of transparency thus far and the
disagreement among EMU members once again risks sowing more fear rather
than calming anxieties.

Whatever impact the stress tests may have, Nowotny warned against
directly linking ECB policy and results of the tests. “You have to see
the two issues in a separate way,” he asserted.

While it is indeed governments’ job to bridge any recapitalization
needs and deal with any potential fallout from weak banks, the
experience of this crisis has shown that it is in fact the ECB which
steps in when push comes to shove.

–Frankfurt newsroom +49 69 72 01 42; e-mail:jtreeck@marketnews.com

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