So in the relatively early going, European markets are already giving a raspberry to Friday’s stress test results. After initially popping higher (following the lead of the US post-results), they’re sliding into slightly negative territory.
Naturally, the coming days will see a lot of stress-test hole-poking.
We’ve already brought you JPMorgan’s take. That firm thinks 54 banks should have failed, and that the total capital needs for the system ought to have been MUCH higher.
Now Morgan Stanley is out with a note, which we’ll bring you more from today, but here’s one interesting part about how weak the economic assumptions were.
In particular, while it is understandable that the benchmark scenario is somewhat more optimistic than ours for the above-mentioned reasons, we think the general tone of some of the country-specific GDP assumptions in the adverse scenario tends to lean on the bright side, especially for 2010.
For example, Greece’s adverse GDP scenario postulates a 4.6% contraction this year – somewhat better than our base case of a contraction of 5%. This is not to say that there is no upside whatsoever in Greece. Rather, it is an observation that – in the context of a deepening recession – there is perhaps scope to stress test some of the countries currently under the market spotlight more aggressively. The 2011 GDP assumptions are consistent with our view of core countries outperforming the periphery, but a severe credit crunch would perhaps depress the economies of both groups to a greater extent.
Got that? The adverse scenario in Greece was still better than MS’ case.
The following chart details the various scenarios:
Photo: Morgan Stanley