The results of the so called stress tests for all EU banks, within and outside the Euro zone, will be announced later. This is one of the features of the sovereign debt crisis, which, having engulfed the Euro zone, is, like the Murdoch scandal, seeping across the Atlantic. Standard and Poor’s today declare a 50% probability of a US downgrade unless there is an armistice in the US economic war of principle between the White House and Capitol Hill. Added to Greece, Ireland, Portugal and perhaps Italy and Spain, the debt crisis is beginning to shape up big.
At the heart are the busted banks. Because of the stuff in their balance sheets, including bets and instruments of opaque value and money owed by countries who cannot pay, some banks will fail the tests; unfortunately these will be fewer in number than those which will actually fail or need rescue when the default cycle starts.
These uncertainties are made very much worse by the inability of the Europeans to agree a common policy to manage their common currency and the failure of the Americans to stop grandstanding untenable economic positions and get real. In effect any country requiring a bail out is defaulting, because it cannot pay its dues to banks. To stop another banking crisis, the EU, the IMF and the ECB are lending taxpayers’ money to busted countries in order that the busted banks can survive a while longer. This is a pointless process which will have to stop.
The reality is that the western economies are collectively over borrowed and have no realistic chance of paying off these debts, without plunging into a vicious circle of cuts and economic stagnation in the failed attempt to do so. Sooner or later there will have to be the acceptance of a collective partial default in order to restore a coherent economic function. To what extent these debts will have to be written off, depends on how far various governments, including the US, can reduce expenditure and increase taxation in order to eliminate their budget deficits. In other words two things have to be done. Get the income and expenditure streams into balance, to include servicing and repayment of a manageable element of these debt mountains and then add up the losses. Until that net figure is known and therefore bank losses can be measured, stress tests will not mean what they appear to say.