Euro Stress Tests Tell Only Half the Story

by Simon Nixon

Wall Street Journal
July 18, 2011

Here is what the official stress tests results didn't tell you: 27 European banks would need to raise a combined €82 billion ($155 billion) in new capital to maintain core Tier 1 ratios above 7% if Greek, Irish, Portuguese, Spanish and Italian government bonds were written down in line with market prices, according to Credit Suisse. That is well above the €2.5 billion shortfall, spread across eight banks, announced Friday.

Even so, some policy makers might take comfort from this figure since it represents an apparently manageable 8% increase in the sector's €1 trillion of equity capital. That would be a big mistake. The €82 billion doesn't tell the full story.

First, policy makers should note that the biggest shortfalls lie in banks least able to access new capital. Greek banks, for example, would need an extra €33 billion of capital. If Greece is to stay in the bloc of euro-using nations, that money can only come from further bailout loans. Irish and Portuguese banks would face €16.4 billion and €6 billion shortfalls, respectively, Credit Suisse estimates.

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