Not with a bang but a bleat did the results of the European bank stress tests arrive on Friday.
Seven of the 91 European banks tested were found to need just €3.5bn of additional capital, most of which they are already in the process of raising. But, given a mounting consensus that the assumptions of the tests weren’t quite stressful enough, what might happen if some ‘real’ anxiety was encountered in the European system?
It was a question pondered by Barclays Capital on Friday afternoon:
If a real-life stress scenario were to unfold for the periphery, a Greek-like package could be activated to take the troubled countries “off the markets” until 2013. On our estimates, the overall potential EU-IMF funding requirement could be in the amount of EUR513bn: EUR387bn for Spain, EUR66bn for Portugal and EUR65bn for Ireland, disbursed in quarterly tranches. These estimates are based on gross government funding for 2010-13 (net of the issuance already done in 2010) plus bank recapitalization needs (see Figure 1).
But here’s the rub. Europe’s existing bail-out SPV isn’t pre-funded.
As noted earlier, the European Financial Stability Facility (EFSF) will basically compete in the supranational bond space. That is, it will have to issue the debt for the monies it plans to disperse.
Back to BarCap:
In our view, a potential shortcoming of the European Financial Stability Facility (EFSF) design is that it has not been pre-funded, which means that in the hypothetical case of a large request for funds, EFSF debt issuance would need to be done precisely when markets would be less willing to buy EFSF bonds because of market stress. Furthermore, the burden of the EFSF sovereign-guarantees would need to be spread among the remaining EU members. Also, heavily indebted and fiscally challenged EU countries (eg, Italy) would be unable to offer much reassurance to markets.
No surprise then, that the analysts reckon something more would be needed to deal with genuine stress — should it ever crop up in the eurozone:
In a real stress scenario, the available EUR60bn in the European Commission BoP lending facility would be needed, but this would not be sufficient. The IMF funds would also need to be activated, either as stand-by loans or enhanced flexible credit lines. From a stability perspective, we think the EFSF facility would also benefit from more explicit back-up from EU countries, possibly in the form of some disbursed funds upfront by the member states. Additionally, an asset-purchase program by the Eurosystem would need to be activated to help viable banks with problem assets (clearly, non-viable banks should be resolved separately). Such a package would be sufficient to cover 2010-13 funding needs for Spain, Portugal and Ireland plus the estimated recapitalization needs. This is not our baseline scenario, but we note that lack of a stronger backstop could risk the stability of other eurozone member states, threatening the euro itself.
Anyway, ‘real’ stress should be the last thing on any one’s minds this Monday morning.
Markets are up (just) and as one analyst has so eye-catchingly opined:
“These are not tests at all,” declares Stephen Pope, chief global equity strategist at Cantor Fitzgerald in London. The banks, rather than being “worked hard and placed under real stress” are being given a “SPA test,” says Pope, which is his acronym for a Soft, Pathetic, Audit. (Via Forbes)
Dim the lights. Play some new age music, and whip out the aromatherapy massage oil now.
Related links:
Enduring the stress of testing 91 banks - FT
Europe’s SPV – not saving anything? - FT Alphaville
SPVery complicated in Europe – FT Alphaville