Morgan Stanley's Huw van Steenis has confirmed that the European Stress Tests will be nothing more than a dud and a farce: the primary risk consideration that is enveloping Europe, i.e. sovereign risk, will not even be discussed at all in the stress tests. With this bit of information everyone can now effectively discount the "Stress" test for what truly are: a Geithner-inspired propaganda tool, which has zero credibility, and which will only seek to persuade the idiot money to buy at least a few Spanish bonds, alongside the ECB, which is now buying up about €10 billion (and rising) in toxic sovereign debt both in the primary and secondary market, each week.
From Morgan Stanley:
Will stress tests include haircuts on peripheral Sovereign debt?
Our take: The guidance we have been given is the tests were not going to include any discussion of sovereign risks for all sorts of obvious reasons, not least the massive EU/IMF support plan for Greece and back-up for other countries. We think that some investors will be disappointed by this. To be clear, one does not have to have a strong view on the outcome of the peripheral bonds either way to realize that a bank with a large concentration of Greek bonds as % of tangible equity may act in a far more risk averse fashion in extending credit than one with a much lower %, given the uncertainty on how this will play out over the coming years – see the exhibit below. This surely is an issue which macro-prudential policy should weigh up, independent of taking a view on what will happen on the debt itself. As we argued in our last note, the vast majority of banks which hold Greek bonds in their held to maturity books have not sold their Greek debt. However, it appears that this is a keen debating point. Madame Lagarde told Reuters today: “We will stress the system a little more to make the results more credible.”
For us this is the definitive "credibility breaker."Any readers who are not quite as convinced, and wish to read Huw's full take on this latest farce, can read the full note below.