Stressing the Stress Test

The Euro Stress Tests have been announced and there is again very little shocking new news. 8 of the 90 banks tested, failed. That’s only 8.8% of the banks tested in Europe. If you open up the report you will find the second headline number. A full 17.7% of all banks in Europe that were tested, need to raise capital.

Once capital-raising actions in 2011 are added, the EBA’s 2011 stress test exercise shows that eight banks fall below the capital threshold of 5% CT1R over the two-year time horizon, with an overall CT1 shortfall of EUR2.5bn. In addition, 16 banks display a CT1R of between 5% and 6%.

The ECB and all of its daughter national central banks, holds a joint $80 Billion or so in official paid in capital. In the US, the Federal Reserve system returned to the US Treasury over $80 billion in spare interest payments alone. That is, the Federal Reserve returned spare capital to its government.

Before you blink, think about it this way. Europe is the home of western banking, surely they know what they are doing.

This isn’t the only place where the US and Europe differ in approach to the structure of finance. The US is a Federalized Republic.That is the US has a Federal department of war (currently named defence), a federal department of the Treasury. What we call the US Treasury. Europe does not have this level of federalized control over its finances.

The European Union currently does not have its own Treasury department, and the whole crisis in Europe currently revolves around this lacking issue. While writing this post, I came across a single paragraph that beautifully summarizes the European reality of today.

When you quit kicking the can, there is only one solution. It was written at in his Europe piece published today here.

Cutting through all of the various theories and doomsday forecasts of the assorted euro punditry, there is really one core issue that matters above all others – European fiscal integration. The euro-zone is doomed to be a failure if the 17 member states are unable to come together to form a European Treasury with the power to issue euro bonds, enforce tax laws (police powers), and oversee and enforce budget discipline etc. As it now stands, countries can violate the Maastricht Treaty and run large deficits while receiving nothing more than a slap on the wrist from Brussels. Greece even went as far as to hide the true extent of its debt in order to join the euro, then once it had joined, deficit estimates were consistently revised upward.

The end is clear, how Europe arrives there isn’t.  $FXE is the core currency, but the $FXB and $FXF will both feel the $macro moves that will be unleashed as Europe fights its way into a working solution.

Filed under: Banksters, Communications, Europe, International

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