Thursday, June 2, 2011

European Credibilty

In a solvency crisis, the question of credibility always arises.  The issue is one of trust…who can one trust?

The European Banking Authority (EBA), which opened for business this year, is now under the gun.

One of the jokes of the earlier European sovereign debt meltdown was the stress test that was administered to European banks.  The “stress” of the tests were not that stressful and the results were dismissed as irrelevant.

One goal the EBA set out to achieve was to administer a stress test that was credible and would provide a “realistic” view of how European banks would weather a new round of financial distress.

The tests were begun in March…the results of the stress tests were to be released in June.

The EBA has now asked banks to resubmit their information because “The EBA is currently assessing and challenging the first round of results from individual banks.  This will mean that another round of data will be required…Errors will have to be rectified and amendments made where there are inconsistencies or unrealistic assumptions.”

That is, there are “concerns that some countries and institutions made mistakes or used overly rosy assumptions.” (

But, there seems to be another problem imbedded in these European stress tests.  “As with 2010, the EBA has also failed to include the possibility of a sovereign debt default, in spite of bail-outs in Greece, Ireland, and Portugal.”


Much of the discussion surrounding the issue concerning what the European Union should do about Greece and the restructuring of Greek debt hinges on the inability of European banks to handle a write-down of Greece’s sovereign debt. 

I quote from my Tuesday morning post:
“Moody’s Investors Service estimates the European banks hold about €95 billion in Greek sovereign and private debt—and could lose one-third of it in a worst case scenario.”

European banks hold some €630 billion in Spanish debt. If Greece defaults in any way, shape, or form, the question is, “What about Ireland? And, Portugal? And, Spain? And, Italy? And…?” (See

Where is the credibility in the stress tests, even if the banks use more pessimistic scenarios in the information they resubmit to the EBA?

And, as I suggested yesterday, leaders in America should be paying attention to the lessons being generated by the events now going on in Europe. (

The monetary and banking authorities are facing a situation in which one out of every seven commercial banks in the country is on the FDIC’s list of problem banks.  About one out of every four commercial banks in the country is “troubled.”  The number of banks in the banking system dropped by 320 banks in 2010 and we are on track for the number of banks to decline in 2011 by about the same number, which is about 5 percent of the commercial banks in the United States. 

The American banking system is not that healthy.  And, as a consequence, commercial banks, as an industry, are not lending.  The housing market continues to sink.  And, commercial real estate continues to be listless.  There are big pieces of the economic picture missing.

Maybe the leaders in the United States need to admit to these problems.  Maybe they need to learn something from the European situation in which the severity of the banking problems are hidden in incomplete stress tests while the whole “relief” program for Greece…and others…are being based upon the weaknesses in the banking system. 

The credibility of the European leadership is not doing well in the face of their lack of transparency.

The credibility of American leadership is facing similar shortcomings.

Maybe this is why Sheila Bair is leaving the FDIC…the end of her term of appointment being just a convenient excuse.  Maybe Sheila Bair knows something that the current administration does not want out in the public domain. 

My friends tell me that if the way a person talks does not match up with the way a person walks…then there is a credibility problem!  That is, watch the hips…not the lips!

I see this problem in Europe.

I see this problem in the United States.  President Obama and others in his administration, Ben Bernanke and Tim Geithner, are explaining their actions in ways that do not seem to be consistent with the facts.  The result is public and investor confusion, uncertainty…and discontent…with their policies.

Europe does not seem to have anyone that can provide the leadership it needs…and this does not bode well for its future.

One keeps hoping that Obama will step up and provide the leadership for the United States.  But, I am afraid that this will not happen.  After all the number one responsibility of any government official is to get re-elected.  And, we are in that season.      

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