EU to publish ‘stress test’ findings

Aims to restore faith in markets

John Kolesidis/Reuters Members of the communist’s labor union marched against the government’s austerity measures in Athens yesterday. John Kolesidis/Reuters
Members of the communist’s labor union marched against the government’s austerity measures in Athens yesterday. (John Kolesidis/Reuters)
By Aoife White
Associated Press / June 18, 2010

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BRUSSELS — European Union leaders agreed yesterday to go public with the results of “stress tests’’ checking the stability of the bloc’s banks, an attempt to restore confidence to markets spooked since Greece demanded a bailout to prevent an embarrassing default.

Markets welcomed the news with the euro climbing to about $1.24, its highest in about three weeks, and stock markets rising.

Despite market fears that Spain may be the next country to need a rescue, EU leaders meeting at a summit of the 27-nation bloc in Brussels insisted that they are not worried.

French President Nicolas Sarkozy said, “We don’t believe there is a problem, and that’s the analysis of all 27 of us.’’

Under intense pressure from markets and other EU nations, Spain is pushing through budget cuts and changes to labor policy that Spanish Prime Minister Jose Luis Rodriguez Zapatero said would encourage companies to hire more workers.

Spain is also trying to stem speculation that it could follow Greece in requiring financial aid to rescue its banking system by announcing it would test how well its major banks could cope with more losses if the economy worsens and house prices tumble further.

Its move inspired the EU’s broader decision to publish banking stress tests.

In a sign markets are worried about Spain, investors charged the government sharply higher interest rates at a bond auction yesterday that raised $4.3 billion.

Zapatero called for “demanding’’ tests across Europe to prove that the region’s banks could weather any new crisis.

“There’s nothing better than transparency to demonstrate solvency, to give confidence and to leave all these unfounded rumors behind us,’’ he told reporters.

European President Herman Van Rompuy said the results of the tests on each of the Europe’s 25 biggest banks will be released in the second half of July.

The United States published stress tests in 2009 to show how much capital the country’s 19 biggest banks needed to raise to cope with more losses.

Such tests give an estimate of what potential losses financial institutions could be facing. If a result shows that an institution can’t cope with necessary write-downs in case of a worsening market environment, the bank is required to put more money aside to counter the extra risk.

German Chancellor Angela Merkel says she will overcome opposition from some banking executives, who cite legal concerns about making the results public.

“We have the intention to publish it, and we will find ways,’’ she said, according to DAPD news agency.

Marco Annunziata, an economist at UniCredit bank, said Europe needs “to finally clear the air on the health of its financial system’’ and that greater confidence in Spain’s financial system could bolster market optimism for the entire eurozone.

The stress tests could calm volatile markets worried about Europe’s soaring debts — both public and private — after a $1 trillion financial rescue package for indebted EU nations failed to put an end to fears of a deeper crisis in the region.

Spain’s total debt, both public and private, could top $442 billion, economist Daniel Gros estimates, and markets are treating the government as if it had debt far above its fairly prudent level of 64.9 percent of gross domestic product this year.