Spain is About to Make Trouble for German and French Banks

Friday, June 18, 2010
By Paul Martin

Ooh, this might get ugly.

The ECB rather firmly resisted the idea of releasing its recent stress test results on individual European banks. And with good reason: many observers suspect that some of the big German and French banks look less than robust. (And this is before we get to the obvious elephant in the room: since they were modeled on the too-bank-friendly US stress tests, even this measure is likely to be too permissive).

Desperate times are now producing desperate measures. Spanish firms are locked out of international credit markets. Its banks are getting funding from the ECB.

The Spanish authorities think this is all misguided prejudice (which is not entirely accurate, its savings bank, the cajas, which were not subject to the ECB stress tests, are a bit of a mess, to put it politely. The last few weeks has witnessed rescues and forced marriages among the cajas). So it has decided to defy the ECB and publish the results of the tests on specific Spanish banks.

But why should this work? First, the pressure on Spain intensified with the downgrade of its government debt by Fitch. That was due in turn to the fact that Fitch sees that the severity of its austerity measures will lower tax receipts, making Spain a worse credit risk. This also affects banks, since it is national governments that backstop their banking systems. But the big cause for alarm was the validation of the idea that austerity might actually exacerbate budget crises, the opposite of their intent. And an economic slowdown isn’t very good for private sector creditworthiness either.

The Rest…HERE

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