FRANKFURT (MNI) – Adverse scenarios tested in the European Union’s
stress tests include a mild recession over the next two years, stock
markets plunging by a fifth, as well as interest rate shocks and
considerable declines in the market value of sovereign securities,
well-informed sources told Market News International on Friday.
The adverse macro-economic scenario sees a decline of 0.3% of GDP
over 2010 and 2011 combined, which assumes a 3 percentage point
cumulative deviation of GDP for the EU compared to the European
Commission’s forecasts.
The Commission had forecast EU GDP growth of +1.0% in 2010 and
+1.7% in 2011.
In addition to a double-dip recession, the tests also assume a 20%
decline in stock markets and a downgrade by four notches of credit
ratings on holdings of securitised products, sources said.
The stress tests applied a 23.1% haircut on 5-year Greek bonds, a
14.0% haircut on 5-year Portuguese bonds, a 12.3% haircut on 5-year
Spanish bonds and a 5.6% haircut on French 5-year bonds.
Haircuts are only applied to banks’ trading books and not their
banking books, as no default or restructuring of sovereign debt is
expected or tested for, the sources said.
Regulators also tested the potential impact of rising sovereign
debt yields on private debt yields and the consequent increase in
private debt default risks for each country, sources said.
Banks that failed to maintain a tier 1 capital ratio of 6% under
each adverse scenario failed the tests.
The Committee of European Banking Supervisors (CEBS) is due to
publish the results of 91 banks EU bank tested at 18:00 CET.
Prior to the release there had been a criticism that scenarios
tested are in fact not stressful enough, making the tests a pure PR
exercise. Policymakers from all authorities involved, however, have
insisted that the tests are not only realistic but also very tough.
–Frankfurt newsroom +49 69 72 01 42; Email: frankfurt@marketnews.com
[TOPICS: M$$EC$,M$X$$$,M$$CR$,MT$$$$]
