Irreverent Economics

For those of us belonging to the strange subculture where bank  capitalization is interesting, next Friday is an important day on the calendar. That is when Europe  releases its stress test results for its banks.

This has been a long and arduous journey. While the US was happy  provide the public with the results, Europe resisted. Why could that be? Perhaps because the regulators knew the precarious situation of the European banks and did not want the markets to know. Somehow, nobody thought that not providing information might be a worse signal. Nah, that is too cynical.

Eventually, some countries –  thank you Spain –  decided that this had to be public. After all, if the  likes of  Santander  cannot  borrow  on the interbank  market something is wrong. Perhaps a positive stress test result might solve this little problem.

Of course, they still managed to mess it up. The standards and methodology are not uniform across Europe. In some countries its run by the central bank without the banks knowing what is being stressed,  while in other countries – Germany – the banks run the tests.

Rumor has it that the probability of default for Greece is only 3%,  providing relief for certain institutions.

It will be interesting to see who survives, and especially how  the results will be fudged.  If the Greek banks  do well something is wrong. Then maybe all will pass, or only some insignificant institutions.

There is too much politics in this. Is Europe heading for the Japan route?

Only three days to go.