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How weak were Europe's bank stress tests?

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July 23, 2010 – Comments (7)

Pretty weak based on this WSJ article. Notably because:

The tests ultimately didn't look at the possibility of a sovereign default

Yeah, because that's a super low probability event that would cause a massive problem across a multitude of European banks.

7 Comments – Post Your Own

#1) On July 23, 2010 at 5:50 PM, dinodelaurentis (73.09) wrote:

My God man, you don't want people... to... to... doubt their banks do you??!!

ANARCHISTS SPOTTED!!!! ALARM! ALARM!!

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#2) On July 23, 2010 at 5:50 PM, dinodelaurentis (73.09) wrote:

My God man, you don't want people... to... to... doubt their banks do you??!!

ANARCHISTS SPOTTED!!!! ALARM! ALARM!!

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#3) On July 23, 2010 at 6:02 PM, davejh23 (< 20) wrote:

More notably because they're using accounting fraud, similar to the mark to myth BS used in the US, to mask their true financial condition.  The "stress tests" were a show to ease investor's fears and buy some time...there's not an analyst in the world that believes that this was a meaningful exercise.  I'm waiting for investor's to call their bluff...

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#4) On July 23, 2010 at 6:09 PM, MoneyWorksforMe (< 20) wrote:

"Yeah, because that's a super low probability event that would cause a massive problem across a multitude of European banks."

I don't think "super low probability" is the right choice of words. The probability of a Greek default is currently 48.1%, which is based on current CDS prices and *assumed* recovery levels. I certainly don't think 48.1% is a super low probability. Heads, Greece defaults, tails, they manage with significant austerity. 

Chances of default: Hungary 26.08%, Portugal 20.88%, Ireland 18.86%, Spain 16.13%, Italy 13.23%, France 6.08%, 5.67%, Germany 3.51%.

I don't think any country except Germany at 3.51% could categorically be considered a "super low probability". 

The test should have looked at the possibility of a sovereign default. This is precisely what most investors are worried about, and justifiably so.

http://online.wsj.com/article/BT-CO-20100723-711383.html

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#5) On July 23, 2010 at 6:38 PM, allstarvulture (< 20) wrote:

MoneyWorks-

Thanks for adding those numbers.

Was there anyone who pays attention that genuinely thought that the stress tests would be reported back as anything other than a positive?  If so, please say why.

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#6) On July 24, 2010 at 12:35 PM, TMFMmbop (39.63) wrote:

I was being sarcastic when I called it a super low probability. The stress tests should have accounted for sovereign default risk somewhere in Europe.

Tim 

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#7) On July 24, 2010 at 11:11 PM, weihou258 (< 20) wrote:

Other than slow recovery, this seems to be the last shoe dropped (short term). Most of companis reported good second quarter earnings; The bad ones already priced in. Technically, S&P500 broke the down trend ceiling. Maybe it is time to back in?

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