Euro Crisis – Getting Worse
I might be premature (always the risk when commenting on markets) but…
It looks to me like the Eurozone Bank Stress tests have utterly failed.
They are only two reasons for doing these tests – either the aim is to genuinely test if the banks are healthy enough to take possible losses and identify which banks require more capital OR the aim is simply to reassure the markets that the banks are fine.
The second type of tests can work – the US stress tests of 2009 served this purpose, even though the ‘worst case’ they tested tended to be better than the actual out turn in economic data.
It looks like this is what the Europeans were trying to achieve with these latest tests – not testing for even a Greek default (let alone Portugal, Ireland, Spain, Italy) is simply incredible.
The market reaction today suggests that the markets have not been reassured.
That now seems unlikely – the Eurozone authorities are divided and seem unable to agree to anything until the very point of crisis.
Kicking the can down the road is fine for a while, especially if the time bought is used to recapitalise banks and prepare for the inevitable. However the time bought is not being well spent and the authorities are rapidly running out of road to kick the can down.
Or just let the banks fail..
The one thing Trichet and the ECB care about more than 2% inflation in Germany is the health of the big banks. An Italian default is not possible without a massive european banking crisis. This means that the ECB will step in to buy Italian bonds if rates rise much further. The EFSF will probably also expand its role to effect a partial fiscal union by stealth. This is the right outcome and should be happening now, but it will take threats to the banks themselves to wake up the dopey ECB.