Tuesday, June 22, 2010

The "Very Very" Dangerous EU Stress Test Results Are Coming

Will the EU publish sanitized stress test results in July? Or will the numbers contain enough of reality to cause flight from certain banks? Ambrose Evans-Pritchard explains how dangerous the release of these numbers could be:
We already know that the eurozone money markets seized up violently in early May as incipient bank runs spread from Greece to Portugal and Spain, threatening the first big sovereign default of our era.

Jean-ClaudeTrichet, the president of the European Central Bank (EC), talked days later of "the most difficult situation since the Second World War, and perhaps the First".

The ECB’s latest monthly bulletin gives us some startling details. It reveals that the bank’s "systemic risk indicator" surged suddenly to an all-time high on May 7 as measured by EURIBOR derivatives and stress in the EONIA swaps market, exceeding the strains at the height of the Lehman Brothers crisis in September 2008. "The probability of a simultaneous default of two or more euro-area large and complex banking groups rose sharply," it said.

This is a unsettling admission. Which two "large and complex banking groups" were on the brink of collapse? We may find out in late July when the stress test results are published, a move described by Deutsche Bank chief Josef Ackermann as "very, very dangerous".
There are so many trigger points for panic in the global financial system right now that it is mind boggling. In addition to the EU bank problem, in the U.S. in July,  46 of the 50 states start a new fiscal year, with many states on the verge of bankruptcy.

It is for sure a time to think of the world in terms of what G.L.S. Shackle  calls the "a skein of potentiae...[that could result in] the partial or mixed success of several [elements that] would lead to interior paths within this boundary, or to the temporary loss of a sense of direction. Such a loss of direction, in the economic aspect of affairs, might consist in a catastrophic slump or an uncontrollable inflation and the destruction of the currency and the society's confidence."


  1. LOL, I love watching AEP shivering in his boots that his lovely world order might be toppled over with a slight push.

  2. Huh?! I'm going to assume you hadn't had your morning coffee before this G.L.S. Shackle quote oozed out of your word processor. Nonetheless I will try to play by choosing "...would lead to interior paths within this boundary..."

    The US bank stress tests did not result in a "catastrophic slump" and its unlikely the European version will do so. In any event, the market and society is more insightful and robust than you sometimes give it credit for.