by Geoffrey T. Smith
Wall Street Journal
March 18, 2011
Europe’s bank stress tests may end up being slightly tougher than last year’s. But first indications suggest that they are again going to fall well short of what’s needed to restore confidence in the region’s banking sector.
The materials released by the European Banking Authority Friday confirm the biggest doubts about the test, in that they provide no convincing reassurance on the value of all the exposures of European banks to states that are, or may be, insolvent.
This isn’t the EBA’s fault—only governments can decide whether or not they are going to honor their debt (or their fellow sovereigns’), and this is a question that won’t be answered—at the very earliest-until an EU summit at the end of next week.
Even after that, the fact remains that political pressures can drive the Greek or Irish governments at any time to say “enough is enough” and repudiate the rescue deals that, on paper at least, should stop them defaulting over the tests’ two-year horizon.
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