Europe's new banking regulator warned that an escalation in the eurozone crisis could pose "significant" challenges even as it announced only eight banks out of 90 had failed an annual check of their financial strength. A further 16 banks were also deemed to be in a potential danger zone as they only just passed the tests, which looked at the impact on banks' capital cushions of a deterioration in the economy and house prices. However, the tests failed to consider what may happen to banks if a major European country – such as Greece – defaulted on its debt, promoting many analysts to argue the hurdles were set too low. As the results of the tests were announced by the European Banking Authority (EBA), European Union president Herman Van Rompuy called the leaders of the 17 members of the eurozone to a summit next Thursday to thrash out the much anticipated second bailout for Greece. Anxiety about Greece continues to put the eurozone under severe stress and Andrea Enria, chairman of the EBA, described current market conditions as "under severe strain" as he said: "Further deterioration in the sovereign debt crisis might raise serious challenges." All Britain's banks – bailed out Royal Bank of Scotland and Lloyds Banking Group as well as Barclays and HSBC – passed though they suffered a 25% reduction in their capital cushion during the adverse scenarios imposed upon them by the Europe's banking authorities. Only Greek banks suffered a larger fall – of 40% – demonstrating the wide range of exposures of Britain's banks.
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Saturday, July 16, 2011
Europe's new banking regulator warned that an escalation in the eurozone crisis could pose "significant" challenges even as it announced only eight banks out of 90 had failed an annual check of their financial strength. A further 16 banks were also deemed to be in a potential danger zone as they only just passed the tests, which looked at the impact on banks' capital cushions of a deterioration in the economy and house prices. However, the tests failed to consider what may happen to banks if a major European country – such as Greece – defaulted on its debt, promoting many analysts to argue the hurdles were set too low. As the results of the tests were announced by the European Banking Authority (EBA), European Union president Herman Van Rompuy called the leaders of the 17 members of the eurozone to a summit next Thursday to thrash out the much anticipated second bailout for Greece. Anxiety about Greece continues to put the eurozone under severe stress and Andrea Enria, chairman of the EBA, described current market conditions as "under severe strain" as he said: "Further deterioration in the sovereign debt crisis might raise serious challenges." All Britain's banks – bailed out Royal Bank of Scotland and Lloyds Banking Group as well as Barclays and HSBC – passed though they suffered a 25% reduction in their capital cushion during the adverse scenarios imposed upon them by the Europe's banking authorities. Only Greek banks suffered a larger fall – of 40% – demonstrating the wide range of exposures of Britain's banks.
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As financial markets deliver their verdict on the results of controversial stress tests on European banks and political leaders prepare for a crunch summit to discuss the single currency crisis on Thursday, the ECB president, Jean-Claude Trichet, said governments needed to improve "verbal discipline".
"There is an absolute need to improve 'verbal discipline'. The governments need to speak with one voice on such complex and sensitive issues as the crisis," Trichet said. In an interview with Financial Times Deutschland conducted last week, he reiterated that the ECB would not accept bonds from a nation that defaults as collateral for fear of triggering a "Lehmans-style" event in the financial system.
"If a country defaults, we can no longer accept as normal eligible collateral defaulted bonds issued by the government of that country," he said. "Because … this would impair our ability to be an anchor of confidence and stability.
"The governments would then have to step in themselves to put things right ... the governments would have to take care the euro system is presented with collateral that it could accept."
But he did not elaborate on how governments could secure liquidity in case of default. In what Trichet might regard as a lack of verbal discipline, the Irish deputy prime minister said on Sunday that he would like to see the eurozone issue common bonds to soak up the bloc's debt. "It is an option I favour. It is one of a series of options that have to be looked at," Eamon Gilmore told Irish state broadcaster RTÉ.
With the financial panic now hitting Italy, and funding costs for banks rising, leaders are under mounting pressure to come up with a long-term rescue plan for the entire eurozone.
That could mean beefing up the European financial stability facility - the bailout fund created last year. The EFSF has the power to issue bonds and lend the money to crisis-hit economies; but it is much too small to rescue Spain or Italy, and it cannot buy embattled countries' bonds directly, in the event of a crisis.
Jürgen Michels, of Citigroup, warned that any change in the rules for the EFSF would have to be passed by national eurozone parliaments, which could take too long to tackle an emergency over the summer. "Only in situations of emergency are the individual member countries able to overcome the divergent national interests," he said in a research note.
"As a result, we have seen only ad-hoc emergency measures so far, mainly designed to deal with problems in individual member countries. Hence, with the warnings that the euro as a whole is at risk now, a more far-reaching ad-hoc emergency measure looks likely to us, but we still do not expect a comprehensive programme any time soon."
Kapoor said: "On the single biggest source of risk, which is sovereign debt, the policy remains as fraught and unresolved as ever."
The dollar fell after the S&P put the US on negative watch on Thursday night and warned it could move as early as this month if talks between the White House and Republicans on raising the government's $14.3tn (£8.9tn) borrowing limit remain deadlocked. A downgrade would raise borrowing costs and some fund money managers that are only allowed to invest in AAA-rated assets would be forced to dump US Treasury bonds, which could trigger disruption throughout global financial markets.
Markets were jittery on Friday ahead of the publication of the annual stress tests on 90 European banks.
S&P said it could downgrade US debt "by one or more notches... if we conclude that Congress and the administration have not achieved a credible solution to the rising US government debt burden and are not likely to achieve one in the foreseeable future".
There was talk that Barack Obama could summon congressional leaders to Camp David this weekend to discuss ways of cutting the government deficit.
John Chambers, the chairman of S&P's sovereign ratings committee, said "this is the time" for the two sides to tackle the country's long-term debt problems. "If you get a small agreement, that will lead to a downgrade," he told Reuters.
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