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European Bank Stress Test Politicians Desperate to hide the Truth of Insolvent Banking System

Interest-Rates / Credit Crisis 2010 Jul 23, 2010 - 06:07 PM GMT

By: Nadeem_Walayat

Interest-Rates

The long waited stress test of the 91 of Europe's largest Banks resulted in just 7 of the smaller regional banks failing the test including one from Germany and Greece, and five in Spain, that require capital injections of just Euros 3.5 billion, which is a drop in the ocean when compared against PIGS sovereign debt of Euros 1.2 trillion, but off course the so called stress test FAILED to test for sovereign debt default.


The banks were tested in their ability to primarily withstand economic contraction of a mere 0.4% which is less than 1/10th that of the recession of 2008-2009, which would have and did wipe out ALL of Europe's banks demanding capital injections and unprecedented tax payer support.

On the basis of 7 banks failing at 0.4% GDP contraction implies that even a mild recession of 2% would in reality see as many as 35 banks fail. Therefore the stress amounts to white wash to try and mask the truth that approximately half of Europe's banks would have FAILED a REAL stress test, requiring at least Euro 120 billion of recapitalisation.

Another failure of the stress test was not to test for the impact of a sovereign debt default as the ECB is in a state of denial that countries such as Greece will not be allowed to default on their debts, which is manifested in the European Unions policy of piling ever more debt onto countries such as Greece whilst at the same time forcing severe austerity measures onto the countries thus insuring economic contraction plus greater debt burden which equals a ever higher real probability of default. Greek debt is on its way towards 150% of GDP where the debt interest burden is already at more than 10% of the Greek governments revenues i.e. $15 billion interest bill against revenues of $115 billion to service a debt mountain of at least $330 billion at over 110% of GDP. Give it a couple more years and the debt interest burden will be at more than 15% of government revenues despite ECB attempts to cap the interest rate at 5%, which means debt default is a near 100% certain, as the ultimate consequences of carrying on with the farce of ever rising total debt and interest payments would be for eventually ALL of the Greek revenues to go towards servicing the countries debt. Other countries such as Portugal and Spain are on a similar path of ever rising unsustainable debt interest servicing burdens that will also culminate in debt defaults.

Therefore the E.U. is living in fantasy land, which is basically what the Bank stress tests are based on fantasy assumptions of VERY mild recessions and no sovereign debt defaults despite the fact the recessions are usually 5 Times as severe as that which has been tested for and countries such as Greece are directly heading towards default within the next 2 years which effectively means that rather than 7 banks failing the stress test, a real stress test would have indicated at least 70 of the 91 banks would have failed the stress test.

Clearly the politicians and the ECB know that most of Europe's banks are insolvent and therefore are running scared and hoping that the stress test publicity stunt will buy them some time so that they can recapitalize the insolvent banks without triggering a crisis in the immediate future.

Bottom line - The European banking system is trending towards another banking crisis as a consequence of near certain sovereign debt default in at least Greece. The E.U. are desperate to persuade the markets that this is not going to happen until it actually happens, in the meantime they intend on immunising their banks against an inevitable sovereign debt default as now they know exactly what exposure the banks have Greek, Spanish and Portuguese debt so know how much the potential losses could be that will be covered by primarily German tax payers.

Comments and Source: http://www.marketoracle.co.uk/Article21351.html

By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-10 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

PS
29 Jul 10, 10:12
inevitable sovereign debt default

Will the stealth bull market continue after the inevitable sovereign debt default in Europe happens? Thanks.


Nadeem_Walayat
29 Jul 10, 11:26
stocks stealth bull market

The whole point of a stocks stealth bull market is that most investors remain too afraid to invest.

and I can't think of anything scarier than a soveriegn debt default :)

Watch stocks break to new highs as most analysts remain fixated on the rear view mirror ;)

A knife that slices through perma beraish rhetoric.


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