Seven of 91 banks have failed, and yet what we’ve learned from those failures is little. Two of the banks are already nationalized, Cajasur and Hypo Real Estate. Four of the other five are troubled Spanish cajas of limited size. The final bank is Greek, ATE.
Goldman Sachs’ survey projected 10 banks to fail this morning. We felt that was reasonable, with several more Greek banks, perhaps Alpha Bank or the National Bank of Greece (which raised capital prior to the announcement), with the failure or Nova Ljubljanska Bank, which also raised capital today, possibly added in.
There are serious doubts of the strength of the tests, not indifferent from when the U.S. government arranged a similar stress test here.
In our pre-stress test report, we said we were looking for failure. We got 7. We’re underwhelmed. It is hard to believe all of these banks, exposed to both real estate debts and the ignored central issue, sovereign debt, would have survived a real stress test.
European authorities made sure that banks passed. This is obvious, because had they not done this they would have created a new crisis.
But they also made sure that markets chief doubt, the state of sovereign debt on European bank’s balance sheets, remains in complete doubt. If more details on sovereign debt holdings are released shortly, then perhaps this can be overcome.
But the reality is that European leaders have not dealt with this situation. Markets will now return to their central concern, whether the euro can stand if periphery states economies continue to weaken, and whether (when) sovereign debt default will occur and endager the currency union.