The Committee of European Bank Supervisors (CEBS) was recently charged with conducting a series of “stress tests” designed to ascertain 91 European banks’ ability to withstand another recession. The results were released Friday, July 23, and so far, market analysts aren’t buying the results.
Modeled after a similar set of tests, which were successful in restoring a measure of confidence in the U.S. economy last year, the European version looked mainly at capital ratios and exposure to several kinds of debt. The hypothetical recession tested the ability of the banks to shift capital in such a way as to cover immediate liabilities, thus “staying afloat.”
The official results saw 7 of the 91 banks assessed defaulting with a total capital shortfall of €3.5 billion. Five of these were located in Spain, while the other two were based in Germany and Greece.
But here’s where it gets a little muddy. Yes, global analysts thought between 5 and 10 of the European banks reviewed would fail, but not by €3.5 billion; those predicting the outcome anticipated a need of more than €30 billion. It seems that in light of this discrepancy, market participants are not willing to buy the test results. Their investment dollars seem to be telling the world they can’t be fooled in such a blatant attempt to restore confidence in a not yet stable economy.
The results made it to New York during early trading hours Friday the 23rd. Almost immediately, Dollar-denominated assets started to see an increase, while other traditional Euro-alternatives took a bit of a dive. Because investors perceived a cover-up, they pulled out of the Euro, and moved into the strengthening Dollar.
Unless the Eurozone can pull a rabbit out of its hat in the near future, Euro-alternatives such as the Dollar and precious metals will continue to attract attention - bidding up their values.