Duncan’s Economic Blog

Euro Crisis – Getting Worse

Posted in Uncategorized by duncanseconomicblog on July 18, 2011

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.

I’ve long favoured proper stress tests and recapitalisation of the at-risk-banks before a managed default of debt by heavily indebted governments.

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.

This won’t end well.