European governments relieved by bank stress tests

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Europe sighed with relief Saturday after most of the continent's banks passed financial stress tests, but analysts warned that the exams might not be tough enough to restore confidence in the sector.

The euro fell just after the release of the test results late Friday but made up the lost ground. US stocks also ended slightly higher but European governments face a nervous wait for markets to reopen Monday to get the full global reaction.

Only seven out of 91 banks failed the tests, which were organised in hope of reviving investor confidence in Europe's embattled banking sector.

German state-owned lender Hypo Real Estate, five regional savings banks in Spain and ATEBank of Greece failed the test of whether they could resist a new financial shock. All have been ordered to recapitalise or take state aid.

The Committee of European Banking Supervisors (CEBS), which carried out the tests, said the seven banks would need about 3.5 billion euros (4.4 billion dollars).

Unicredit chief economist Marco Annunziata said that the results showed that "the bulk of the eurozone banking system is sound, but there are serious questions on whether the tests can be considered sufficiently stringent."

Although the tests were "a first step towards improved transparency," he said that they were "insufficient to bring about the rapid and major improvement in confidence in the European banking system which should have been the main goal of the exercise."

European banks have faced a crisis of confidence in recent months over fears that some may bear huge undisclosed losses on the value of bonds issued by Greece, Portugal and Spain, which have fallen sharply in price since the start of the year.

The European Union's Belgian presidency said: "The aggregate results of the tests show a high degree of resilience in the EU banking sector as a whole, reflecting the efforts undertaken over the last years by the banks and some governments to restore confidence in the European banking sector."

Belgian Finance Minister Didier Reynders, speaking for the EU, told AFP the results were "positive because we have been transparent and the tests were quite strict."

Spain's Finance Minister Elena Salgado insisted the results were "satisfactory" despite the failure of the five savings banks.

"The Spanish financial system has overcome the financial crisis very well," she declared.

IMF managing director Dominique Strauss-Kahn said the tests were "a major undertaking and represent an important step toward improving transparency and bolstering market confidence."

Some analysts however said the checks failed to shed much light on the real state of the banking sector.

The report spared all banks examined in debt-laden Portugal. Greece, which sparked fears for the stability of the entire eurozone and was rescued by an EU-IMF bailout, also got off lightly with just one bank failing.

Neil MacKinnon, an economist at VTB Capital in London, said it "looks like a whitewash and the initial reaction is one of scepticism on the part of the markets."

ING bank analyst Chris Turner said the CEBS announcement "does not appear to have uncovered any 'skeletons in the closet'," but added: "Whether it goes far enough remains to be seen."

The tests measured the banks so-called Tier One core capital and measured it against outstanding assets, such as loans. A key test was the effect a government debt crisis would have on balance sheets which hold large amounts of government bonds.

To pass the tests, banks had to have a minimum ratio of 6.0 percent, above the 4.0 percent normally required by regulators. The CEBS calculated the seven risk banks would see this ratio fall below six percent.

The banks were also tested to see how well they would fare in the event the economy slumped back into recession.

The CEBS estimated that the total potential damage to balance sheets at the 91 banks -- which account for 65 percent of the European banking market -- would be 566 billion euros (727 billion dollars) over two years if certain tough conditions hit.

"Any positive impact on sentiment will be limited by the fact that the tests were not particularly stringent," said analyst Jennifer McKeown with consultants Capital Economics.

"The 'adverse' economic scenario incorporated a return to only a very mild recession next year. What's more, the prospect of an outright sovereign default (which is what has worried markets most) has not even been considered," she added.

© 2010 AFP

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