Wall Street Journal
March 9, 2011
This year’s round of bank stress tests in the EU remains, and has to be, a political exercise. There isn’t any single number that can capture the political risks involved in getting Europe out of its debt hole, so expecting the stress tests to provide one is futile.
The problem remains in the interconnection between bank and sovereign debt.
In Greece, Portugal and Ireland in particular, no-one knows what the bank debt is worth until they know what the sovereign debt is worth. Disappointing as it is, there is no point in testing for an actual sovereign default as long as the EU remains committed to avoiding one.
And it isn’t the European Banking Authority’s fault that it is having to start the review process before the March 24/25 EU summit that will show whether that commitment to avoid default is still as strong as it was last year.
The big picture is that Europe’s banks are going in the right direction, albeit more slowly than anyone would like. Euro-zone banks increased their capital and reserves by €182 billion last year, according to the ECB.
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