As much as this blog was a persistent critic of the US version of the stress tests, I must hand it to the folks at the Treasury: they did an impressive job of dressing up and selling a garbage barge. The combination of consistent cheerleading, extend and pretend, and a few short squeezes did wonders for bank stock prices.
The European version, like most movie sequels, was a shameless rehash that relied overmuch on franchise value. The European authorities really seemed to believe that “stress test” was a magical invocation that would strike terror in the heart of market demons and Euroskeptics. And the rally in the euro and the retreat of Euroworries from front page news would seem to support their belief (although good economic reports out of Germany were probably an even bigger confidence-booster).
But the European stress tests looked to be a Potemkin process. The tests were wrapped up with remarkable speed, the sovereign debt loss assumptions were laughably low, many other elements of the test were not made public, and, as in Lake Woebegone, (almost) all the children were above average.
Not surprisingly, the tests have failed to quell doubts. The Financial Times reports:
Leading UK and continental European companies are increasingly shunning banks from Spain, Italy and even Germany because they do not believe the Europe-wide stress testing of banks gave a true picture of their financial health.
Corporate treasurers from groups with revenues of more than $240bn told the Financial Times they were conducting their own tests to gauge for themselves banks’ robustness…
“There is an element of whether the emperor has any clothes on and what to do if he doesn’t. The stress tests were a joke,” said the treasurer of a large European media company…
Treasurers are now also paying close attention to credit default swaps – the price of protection against a bank defaulting on its debt – as well as to share prices…Companies said they regularly adjusted the limits on how much risk they would take on any one bank via cash deposits, derivative contracts or loans.
A treasurer at a FTSE 100 company in the UK said: “We have no business with Spanish banks and a couple of Italian and German banks. If US banks are refusing to deal with these guys, then why should we?”