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One does not have to dig too deep to discover the exposure level of the banks from the “big” European nations, France, Germany and the UK. Liability risk to the nations that have already been bailed out i.e. Greece, Ireland and Portugal sums to €500Bn. If one broadens the sweep to include exposure to Italy and Spain then the figure leaps to €2Tn. So imagine my concern, but not surprise to learn that the European Banking Authority, (EBA) has revealed that in the course of the 2011 stress tests a mere 8 out of the 90
European banks that undertook stress tests have failed. the EBA claimed that the test would ensure the banks could withstand another financial crisis. What a sham. What a wasted opportunity. In fact beyond the broken 8 a further 16 are considered as in the danger zone. Spain had 5 banks fail the financial healthchecks, 2 Greek banks failed and there was 1 from Austria. I wish for once, the European authorities would be bold and actually design a test that is rigerous. I do not want to see failure for the sake of it, but the financial community at a global level deserves and should demand better. Still, fudge, duck and cover have become a bywords for being European when matters of sovereign debtand bank liquidity are being discussed.
The EBA has called for European financial regulatory authorities to ensure that any recognised capital inadequacybe addressed with all haste. shortfalls in capital are resolved as a matter of priority.
In the UK, the Financial Services Authority, (FSA), said: “…We welcome the publication of the EBA stress tests… The results support our own stress tests…”
The Spanish situation is less convincing as Pastor, Unnim, Caja3, Catalunya Caixa and CAM failed and a further 7 are deemed to be close to the edge. However, as to heeding the words of the EBA, it seems as though Spain is dragging its feet. The Governor of the Bank of Spain said injecting additional capital into failing banks was not relevant. Many of its banks were undergoing fundamental restructuring as a result of sovereign debt crisis fears. I cannot believe that when Spain could be the next sovereign domino to topple, the Spanish authorities are being so casual in their approach.
I cannot help but think that the EBA are looking at financial life with a 12 month lag. They say that the test of 2011 will prompt all banks to rebuild their balances to ensure that they hold enough capital to secure themselves against future liabilities. Just a moment…I thought they were meant to be doing that straight after the 2010 test? Perhaps the perception that the ECB will always help has become the normal way of Iberian banking behaviour. This has a degree of justification as the Bank of Portugal said that 2 of its banks, Banco Comercial Portugues and Espirito Santo Financial Group will now strengthen their capital reserves within 3 months. The country has already received a bail-out worth €78 billion earlier this year; so why are they going to take another 3 months?
We are now on the boundary of treading where too many Europeans have feared to go for too long. The last 2 weeks have seen serious questions be asked about Italy. Marketmind has questioned the sovereign before, but now it appears to be official. the level of debt to GDP in Italy is 120.3%, (Greece 124.8%) and Italian GDP growth after debt servicing in 2011 will be -2.5% (Greece -19.3%), and there is now serious concerns as to whether Italy and at least some of its banks will be dragged into the sovereign debt crisis. Were Italy to be denied access to the international capital marketsthe issues would be severe. The average maturity on Italian national debt is just 7.1 years (Greece 6.8 years). It is the scale of the debt that is most alarming as Italy owes 25% of all the debt in the Euro Zone. It is not just Italy that would feel pain for French banks are seen to hold roughly €90Bn in Italian sovereign debt and have a total exposure to Italy i.e. sovereign plus financial instutions plus corporates of €360Bn. If Italy struggles, the European project will collapse.
To start addressing the matter, albiet with a gun to their heads, the Italian parliament approved a €70Bn austerity package and Italy’s central bank said that all Italian banks had passed the tests. I do not want overstate the Italian case as the banks do have huge deposit bases on which to call…but it is valuable to look further out beyond the immediate crisis, perhaps we need to start digging fire breaks, before the flames engulf Europe completely.
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