July 26, 2010
The tests’ credibility can be questioned in at least four ways. First, they failed to include a scenario involving a sovereign debt default. Second, the assets tested involved only sovereign bonds traded, not those held to maturity by banks. Third, the bar for passing the tests was set low, at a minimum 6% capital-to-asset ratio. Fourth, the tests measured banks’ asset quality but not liquidity. Many banks that passed, such as those in Greece, rely heavily on the ECB for liquidity.
Zach Witton, Moody’s Economy.com
Why was it that national agencies were allowed to determine what might happen to house prices, so the Greek worst case scenario was for only a 2% decline in property prices? Why was the shock assumed to be global, rather than local, including a much higher spike in funding costs in the periphery markets? Why did the worst case assume a smaller gearing of unemployment to GDP than seen historically? Our list could go on. The important thing now is that with the detail provided greater than expected we can tick this box and move on. Ultimately, so much depends on there being a relatively strong recovery, which in our view still requires a weaker euro.
David Owen, Jefferies International Ltd.
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