Charles Wyplosz, the director of the International Centre for Monetary and Banking Studies in Geneva, said political interference has undermined European bank stress tests and he doesn’t have faith in the results.
“The big problem is that the stress tests were a concession among the heads of states about a month ago under market pressure,” Wyplosz said in a radio interview with Tom Keene on “Bloomberg Surveillance” today. “They have masterminded every step of it and for a lot of people, including me, it tells me that I won’t put too much confidence in what they come up with.”
European Union regulators are examining the strength of 91 banks to determine if they can survive potential losses from both a recession and a decline in the value of their government-bond holdings. The tests are being used to reassure investors about the health of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to savings banks in Spain. Banks and regulators will release results of the tests tomorrow.
“There is conflictual information circulating all over the place, so we just don’t know how stressful these tests really are,” Wyplosz said. “If politicians start getting involved in stress tests, we’re not in safe hands.”
He also highlighted the dilemma facing governments as they juggle the threat from budget deficits created during the global financial crisis and the risk that consolidating public finances will push countries back into recession.
“Governments are now stuck between two bad solutions: one is to do expansionary fiscal policy and risk the wrath of financial markets,” he said. “The other option is to try and please financial markets and announce fiscal stabilisation and provoke a relapse into recession. Hopefully, in between, there is a smart path, but that’s not what most governments have been doing. Most governments have been bending over backward to show how tough they are on their fiscal policies.”