— Repeats Item Transmitted At 1421GMT Wednesday

LONDON (MNI) – European Banking Authority Chairman Andrea Enria
faces probably the euro zone’s most challenging job as he prepares to
publish this Friday EU-wide bank stress tests.

Enria had promised a much more rigourous, thorough and probing
test of the banks’ financial resilience than the 2010 tests which
gave the Irish banks a clean bill of health just months before they
imploded, forcing that country to seek an EU/IMF bailout.

‘Peer review’ and ‘quality assurance’ have been the leitmotifs of
this years’s exercise and the EBA has pointedly admitted that
“additional guidance” had to be sent out in early June to “address
shortcomings and over-optimism of some banks’ preliminary estimates”.

The EBA has pledged that sovereign and credit exposures will be
revealed by banks in an unprecedented transparency exercise which will
bring the level of information provision close to that available on US

But while such rigour may have been the watchword a few months ago,
with euro zone debt crisis contagion now infecting Spain and Italy, the
tests also have to bolster confidence.

EU finance ministers will no doubt impress on the EBA that the
stress tests cannot afford to be too distressing at a time when they are
negotiating with the banks on a voluntary rollover of Greek debt as part
of the Greece II bailout package.

Increasingly, the talk is of a massive expansion of the European
Financial Stability Facility from its current firepower of around E440bn
to a level which would stand a chance of bailing out Spain. Dutch
Central Bank Governor Nout Wellink has mooted a E1.5-trillion fund. The
scope of the facility also looks like being enhanced to allow secondary
market purchases.

The International Institute of Finance – the international banking
lobby group – warned in a White Paper on Monday that the stress tests’
insistence that banks reveal their sovereign exposures could further
exacerbate market tension as the scale of the task is laid bare.

And a report out today shows that German banks are not at all keen
on revealing details of their sovereign exposures, suggesting that this
move could exacerbate market tensions and even lead to ‘targeted
speculation’ against specific institutions.

Enria is caught between a rock and a hard place. Convincing the
markets that the tests have been tough enough is the former – but not so
tough that they further undermine sovereign bond markets and the banks
which hold them is the latter.

Speaking at a Business for New Europe event Monday, Enria stressed
that although the tests would provide an ‘unprecedented’ level of
information on EU banks, he is also keeping the current market situation
centre forward.

“Unfortunately, we are still in a very fragile environment and this
is our most immediate task, the stress test definitely fits into this
picture,” Enria said.

One key feature of the tests which could help Enria walk the rigour
vs market confidence tightrope is the requirement of the tests that
banks and governments set out ‘backstop’ measures for those banks which
fail the tests.

Italian and German finance ministers have already said that all of
their banks have passed this year’s tests, but a Spanish paper reported
today that six cajas had failed. So far, more of a confidence message
than the 2010 tests which failed five cajas, Hypo Real Estate and
Greece’s ATEBank revealed problems at Italy’s Unicredit.

Whether this will satisfy the rigour test is another matter.

MEP Vicky Ford, who sits on the European Parliament’s ECON
Committee and on a special EP debt crisis committee told a City audience
Monday that the 2010 tests had been a ‘complete farce’ as so few banks
were failed. This time round she wants to see real credibility in the
backstop plans of governments for those banks which fail the tests.

Not only that but she wants to see government actions spelled out
for those larger banks which only just pass the tests by a slim margin.

All of this said, some market participants are still anticipating a
market bounce or at least a period of respite once the tests are
published and the most overblown fears of speculators and industry
groups relieved.

Just what the overheated markets and the EU political hothouse
needs, says Vicky Ford – a “‘calm down dear’ moment”.

That already seems to be happening – to an extent – after rising to
over 6% – a level considered by many experts to be the danger threshold,
10-year yields on Italian and Spanish bonds have eased back and the
markets are now very much back in ‘risk-on’.

But others think it may already be a case of innocence lost for the
European banking system: Ireland’s banks all passed last year’s less
stringent stress tests before collapsing into the arms of state bailouts
in the Autumn.

“Markets will have a more guarded reaction this time,” says Philip
Shaw, UK and Euro Zone Economist at Investec, “they’re not including
the effect of a default and that’s more likely now than it was last
year, it does make you question the weight of the stress tests.”

–London Bureau; Tel: +442078627492; email: dthomas@marketnews.com

[TOPICS: M$X$$$,MGX$$$]