Friday, July 23, 2010

Why European Bank Stress Test Results are to be Ignored

One word defines the stress test results that are to be released today...silly. Here's why. The European Bank Stress test results will not include the possibility of European sovereign debt defaults. What?!! This is exactly what they are supposed to be measuring; the amount of risk that the banks are undertaking due to their holdings of sovereign debt.

These tests are supposed to give investors and the financial community some idea if the banks can survive defaults in any of their government bond holdings. The results of these tests are to be ignored. This is certainly a coordinated effort at trying to cover up big systemic problems. I believe that everyone in the back of their minds understands that if Greece or other countries were to default, there would be a cascading problem. The value of all the bonds would decline as investors repriced them during a crisis. The banks holding these bonds would face severe losses and the European governments would have to bail them out. It's as simple as that. Ignore these test results.

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