Wall Street Journal
March 8, 2011
Scientists at the sharp end of quantum physics believe the very act of observing tiny particles changes their nature. On the other hand, European regulators, now putting together Bank Stress Tests II (This Time We’ll Do Them Properly), seem to believe that testing for something might make it happen.
At least they do if the something in question is a sovereign default within the euro zone; a euro user unable to pay what it owes. Now this is hardly an unthinkable proposition to most unbiased observers. The chances of poor old Ireland or Greece finding themselves so embarrassed aren’t vanishingly remote.
All the same, according to officials, the stress tests are unlikely to include a sovereign default model. If they did, investors might start to doubt the commitment of the euro club to its more wayward members. Testing held-to-maturity euro-zone government debt might be seen as an implicit acknowledgment that some of the debt issued by euro-zone governments may not be repaid in full.
Regulators reportedly fear that would go back on the European Union’s pledge to stand behind weaker euro-zone nations, preventing default on debt issued before mid 2013.
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