Only markets will tell if tests have restored euro confidence

THE bank stress tests were designed to restore confidence in the euro and Europe’s banking sector but whether they achieve their aim will not become clear until next week.

There were criticisms that the tests were too soft because so many banks passed and because they did not measure the impact if an EU member states defaulted on its debts.

But Giovanni Carosio, the head of the EU’s banking supervisors body that coordinated the tests, insisted this was irrelevant.

The markets can judge for themselves since they now have all the information about what debt the banks hold, he said.

European markets were closed by the time the London-based body released the results showing that just seven of the 91 main banks would fail to survive a double dip recession and a host of adverse happenings.

But the US markets that have long been jittery about the future of the euro remained calm, reacting instead to a slew of upbeat reports from Germany and Britain that showed their economies recovering strongly.

The news surprised the market and this, rather than the bank tests, appeared to give investors more confidence as the cost of German and British debt fell.

Ireland, whose two banks also passed the tests, will be hoping for a similar effect as the state still has to raise additional money to run the country and is paying over the odds for loans.

But as economist Nicolas Veron pointed out, credibility is the issue. “If they have published enough information about the state of the banks to allow investors to make up their own minds – that is the test.”

The banking supervisory body insist they have. But investors will have the weekend to digest the results and decide for themselves. However, judging by the initial reaction of some commentators, they could remain cynical about the strength of the euro and the economy.

Banks that failed the test or performed badly will be expected to raise additional capital quickly but the information on just how much government debt some apparently healthy banks hold could create problems for them, especially if doubts linger over the health of the euro.

Goldman Sachs, who predicted 10 banks would fail, believe the additional information provided by the stress tests should help. However, Nick Kojucharov, a London-based economist with the group, said the lack of information had been affecting bank shares.

“That new clarity should lead to a repricing of the equity of these banks. If we see a recovery in indices it will be a sign the stress tests are doing their job.”