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Confirmed – Eurozone “Stress Tests” Will Not Include Any Default Scenario

Courtesy of Tyler Durden

And now the latest joke – the increasingly more incorrectly named “stress” tests being conducted in Europe are now officially confirmed to be anything but. As Market News reports: “Planned stress tests for European banks will cover their resistance to a crisis in the market for European sovereign debt, but not the scenario of a default of a Eurozone state since the EU would not allow such an occurrence, a German newspaper reported Wednesday.” Now that is some serious downside stress testing. Of course, by the time the stress tests are found to have been a joke, and the country hosting the bank blows up just becase the bank’s assets are 3x the host nation’s GDP, and the country is forced to bankrupt, it will be far too late. So let’s get this straight – the very issue that is at the heart of the liquidity crisis in Europe, namely the fact that a bankrupt Greece has managed to destroy the interbank funding market in Portugal and Spain, and the other PIIGS, and has pushed EURIBOR and other money market metrics to one year stress highs, and forced the ECB to lend over $1 trillion to various central and commercial banks, will not be tested for? Fair enough – if the ECB wants to treat the CDS vigilantes as a bunch of idiots, only to be hounded in the press with derogatory words as “Wolfpack” and much worse, so be it. But it certainly should not be surprised if this is latest show of idiocy by Trichet’s henchmen serves as the springboard for the latest round of spreads blowing up across Europe.

And for those who can not believe their eyes, here it is again:

“In the planned stress tests, European banks will also be tested for their resilience toward a crisis on the market for European government bonds,” German weekly Die Zeit wrote without identifying its sources.

“It is not envisioned, however, to test the consequences of an insolvency of a Eurozone state,” the paper said. “The reason is that the EU does not want to allow a sovereign default and has therefore specifically set up a rescue fund,” the paper added.

The consequences of a downturn of economic activity on banks and their lending will, however, be tested, the article said. Were a bank’s percentage of own capital to fall below 6% in the tests, it would then need to show how it would obtain fresh capital, the article said.

 


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