Ooh, this might get ugly.
The ECB rather firmly resisted the idea of releasing its recent stress test results on individual European banks. And with good reason: many observers suspect that some of the big German and French banks look less than robust. (And this is before we get to the obvious elephant in the room: since they were modeled on the too-bank-friendly US stress tests, even this measure is likely to be too permissive).
Desperate times are now producing desperate measures. Spanish firms are locked out of international credit markets. Its banks are getting funding from the ECB.
The Spanish authorities think this is all misguided prejudice (which is not entirely accurate, its savings bank, the cajas, which were not subject to the ECB stress tests, are a bit of a mess, to put it politely. The last few weeks has witnessed rescues and forced marriages among the cajas). So it has decided to defy the ECB and publish the results of the tests on specific Spanish banks.
But why should this work? First, the pressure on Spain intensified with the downgrade of its government debt by Fitch. That was due in turn to the fact that Fitch sees that the severity of its austerity measures will lower tax receipts, making Spain a worse credit risk. This also affects banks, since it is national governments that backstop their banking systems. But the big cause for alarm was the validation of the idea that austerity might actually exacerbate budget crises, the opposite of their intent. And an economic slowdown isn’t very good for private sector creditworthiness either.
Second, it is has been known for some time that Spanish banks have been heavy users of ECB collateral facilities, way out of proportion to the size of the Spanish economy. So is anyone going to take much solace from good stress test results? Doubtful. Note Spain will disclose results on its cajas too, which may or may not have the desired outcome of reassuring investors (recall how much good all those efforts at “transparency” did Lehman. Many investors seem quite convinced the cajas are still wobbly, and need very large funds injections. One of the reasons the US stress tests succeeded is the Treasury said any bank that fell short, and some did, would be required to raise funds, and if they failed to do so privately, they’d need to take a government equity injection. If investors regard the stress tests simply a an effort to sidestep capital injections, nothing will change. We’ll see soon enough how this plays itself out).
The danger of this move isn’t that the failure to make similar disclosures about French and German banks will lead to more doubts about them (if investors haven’t figured out yet that their delicate condition was the reason that the stress test results had been kept under wraps, they are denser than I realized), but that it will increase frictions among an already fractious eurozone leadership group. Although this is admittedly small beer in the overall scheme of things, one never knows in advance which straw will finally break the camel’s back.
Eurointelligence reports that an unnamed source has told FT Deutscheland that Germany will also release the stress test results. Eurointelligence deems this to be a trial balloon, since the executive branch lacks the power to do so (it requires legislation, which suggests this is really a long shot)
From the Financial Times:
Spanish officials and bankers believe that international investors and speculators are harbouring exaggerated fears about the potential problems of Spanish banks, when the banks of other countries are often weaker than Spanish lenders or have already been bailed out with massive injections of government money.
Miguel Angel Fernández Ordóñez, governor of the Bank of Spain, said on Wednesday in a speech to launch the Bank’s 2009 annual report, that it had carried out stress tests to verify that commercial banks, savings banks and co-operative lenders had enough capital available to support even difficult growth scenarios.
“The Bank intends to make public the results of these stress tests, showing estimated loan losses, the consequent capital requirements and the contribution of promised balance sheet reinforcements, so that the markets have a perfect understanding of the circumstances of the Spanish banking system,” he said.
Mr Fernández Ordóñez gave no further details…
As a result of strict regulation by the central bank, and a cushion of reserves arising from counter-cyclical “dynamic” provisions built up during profitable years, the stronger Spanish banks have so far weathered the crisis in relatively good shape.
Several of the 45 unlisted savings banks, or cajas, however, have proved vulnerable to the collapse of the domestic property market and are being forced into mergers to cut costs and rationalise operations. The Bank of Spain has seized control of two small, struggling cajas, one in the centre of the country and one in the south.
Spanish financial officials on Wednesday denied repeated suggestions from hedge funds and bank analysts that the Fund for Orderly Bank Restructuring, known as the Frob from its Spanish acronym, will need to raise tens of billions of euros to recapitalise the country’s lenders.
They said the Frob was likely to pay out €11bn in loans to support mergers among the cajas, including €4.5bn for the merger among seven lenders led by Caja Madrid.
To cover this, the Frob has €12bn of funds available – €9bn from its initial capital and a further €3bn from a bond issue last November. The Frob is expected to try to raise a few billion euros more after the summer to give it extra funds for emergencies.
Update 12:30 PM: EU leaders have announced they will publish stress test results, but the comments at Bloomberg suggest these are NEW stress tests, not the ones already conducted (which Spain is planning to release). And as pointed out above, Merkel can’t deliver on her promise, she needs the cooperation of the legislature.
European Union leaders agreed to disclose how banks perform on stress tests, seeking to show investors that the financial system can withstand shock…
“We will do stress tests institution by institution and we’ll announce results, though I don’t know the details about how much exactly we announce, like if we release the answers to each question,” French President Nicolas Sarkozy told reporters. Results will be published in July.
The decision by EU leaders came a day after an announcement by the Bank of Spain that it would make its findings public…
“What’s important right now is that we have maximum transparency,” German Chancellor Angela Merkel said in a separate briefing. “If you have something to hide, it would come out into the open in the long run anyway.”….
Merkel sidestepped questions on how the governments would react if tests revealed shortcomings, saying the EU has “taken precautions,” including a 750 billion-euro ($927 billion) financial backstop.
Lordie. That backstop was for sovereign debt, remember? Oh, and a big motivation was to keep the banks from taking losses, Now it will be used to bail out banks directly too? That 750 billion euro facility was looking a little light when announced, and now Merkel is proposing to spread it even further?
All I can say is the authorities had better manage the optics really really well, because if Mr. Market does not like the results, the authorities will be hard pressed to come up with yet another shock and awe campaign.