Stressed? No, hyper-nervous!
Europe is following the American stress tests for major banks. What happens if the economy falls 3%? In one simulation, the banks face rising interest rates, falling currencies and stagnant economic activity. Are European banks able to survive the stress test? According to European Bank President Trichet, it is!
Last Thursday, the ECB president did say that the stress testing of the European banks is facing with confidence. The goal of this statement is to inspire confidence in the financial markets and disclosure pessimism. It would helps stabilize the financial markets. That was the mission that Trichet went on the road trough Europe. The stress tests will be public but Trichet had already determined that the financial markets know no need to worry. Well, a little bit then! It would be good if banks could strengthen their balance sheets downturns. How so, is it still good? European banks were still healthy is it? But how come it that the rates of state bonds go up high again? According to the bank president is a result of the own choice of banks to keep money in reserves to keep a healthy balance on their budgets.
Yes, that’s an old story and confesses. We bring something negative in a positive way. Re-labeling of reality. The rate on state bonds are increase and that is a result of risk management of banks. Do you belief that? Banks are do nothing else on this moment than refinance public state bonds. It is there core business. They make a mess out of it. Last week alone the12 months period loan has to re-finance from 244 billion in Europe only. And that is only last week in Europe!
A less politically charged signal came from the IMF. The International Monetary Fund gives a much truer picture of reality of the current situation in Europe. It states in the Globel Financial Stability Report this week that the crisis in Europe is a major threat to the economic recovery of the global economy! Yes that is a fact!
That is completely different language than the words of Trichet. The IMF fears that the vicious circle between the financial sector and the economy through the debt crisis in the Euro is not sufficient to address their debts. “The risks around the state debt of some countries in Europe have manifested themselves and are then beaten on the financial sector. Because of the close relationship of the network of financial institutions, it is inevitable that financial institutions outside Europe can be infected”, says the IMF.
The IMF suggests that rising interest rates in some European countries should be rounded because of relatively high debts. In the first half of 2010 it was the sharp rise of refinanced state bonds but the problem is that the U.S. and Japan have even a greater recourse to capital markets. Japan and the U.S. have seen this year a total of 4,000 billion to refinance debts. Japanese and U.S. bonds are regarded as more secure than the bonds of a number of European countries. And yes, banks are disruptors on their stress power and forced more capital on hand to hold. There it is. That is the real story behind rising rates of European countries. There is a shortage of money, despite the emergence in the emergency stock, despite the low interest rates and despite the so-called safe investments. Scarcity of resources is rising interest rates and translated into a trust versus mistrust. The central banks can never ever higher there rates because countries are then not able to refinance the state bonds. This is a huge problem.
The IMF has put his finger on the sore spot. It’s thin ice on which the banks engaged in massive capital funding from governments and the spiral goes in hard pace. It is very dangerous. The system is not near water. The stress tests of European banks do not take into account the risk of banks to refinance government bonds with a higher rate. What happens if one country at a given time not be able to find enough capital? These stress tests are not meant for banks but for governments and it never make visible the human actions. The debtor is the weak link and not the issuer of debt. Refinancing state bonds is the theme of 2010 and if we go on this cycle of refinancing reached the stage of idiotism. Governments should do a stress test!
