Maybe The Regulators Are Right Not To Assume Any Sovereign Debt Writedowns

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The subject of the most guffawing today, regarding the Euro stress tests, is the fact that sovereign debt held to maturity was not stress tested to presume any haircut.Only sovereign debt held in trading books was stress tested.

OK, laugh. But consider, the ECB basically has the ability to plug any hole in a country’s auction, and remember, there already is a massive bailout fund in place for countries like Greece, Spain, and the rest. It’s reasonable to think that as long as Europe refused to allow any, there won’t be any sovereign defaults.

And beyond that, let’s suppose Spain does go down… well then the whole system is probably screwed, and no capital raising (today) will really help. In other words, there are probably only two scenarios: the optimistic path, and the nuclear scenario. Why bother stress testing for the end of the world?

For a complete overview of the stress test news, see here >

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