EU Warns Nations on Bank Stress Tests

European finance ministers have defended stress tests currently being carried out on 91 of the region's banks, amid EU calls for governments to be ready with aid when the results are published on 23 July.

With some analysts predicting that between 10-20 banks could require millions of euros in recapitalisations, EU economy commissioner Olli Rehn said on Monday evening (12 July) that national capitals must "prepare for any possible pockets of vulnerability" by getting their "backstops" in place.

Adding to tensions, a number of market participants have raised a series of doubts over the thoroughness of the tests that are designed to assess banks' abilities to withstand future financial shocks such as a national debt restructuring.

News, however, that China last week bought roughly €400 million in Spanish bonds will provide considerable cheer to EU finance ministers meeting in Brussels on Monday and Tuesday, with the return of Asian investors after a two-month pause seen as an important vote of confidence in the eurozone's economy.

Speaking to journalists on the sidelines of Monday's meetings, German finance minister Wolfgang Schaeuble denied the tests had been devised so that banks would easily sail through.

"First it was said that they were too tough, that they would lead all the banks towards bankruptcy. The next day it was said that they were too weak and that the exercises is useless," Mr Schaeuble told reporters.

"In general, the truth lies somewhere in the middle."

Germany's state-owned regional Landesbanken have been identified as some of Europe's weakest, with a study by PricewaterhouseCoopers also showing a number of British banks and Spain's regional lenders as being considerably exposed to non-performing loans.

Time for the €440 billion emergency mechanism?

One question is where European governments would find the necessary money, if called upon, to carry out further expensive bank recapitalisations, with some in Brussels suggesting the eurozone's €440 bail-out fund – known as the European Financial Stability Fund (EFSF) – could be used.

Originally intended to bolster the public finances of governments struggling to raise money on capital markets, supporters say the money could be indirectly channelled into banks.

But other EU sources say such a move would be impossible, with late-in-the-day Slovak reluctance to sign up to the bail-out mechanism also raising a further question mark. The country's new government has said it wants its contribution to the scheme, roughly €4.4 billion in loan guarantees, to be reduced.

With pressure growing on Bratislava to sign up, the stability fund's manager has said its failure to do so would not prevent the fund from raising money through debt issuances.

"The EFSF could begin financial operations if necessary, if required, almost immediately," said Klaus Regling.

Separately on Monday, EU finance ministers gathered with European Council President Herman Van Rompuy to discuss reform on the EU's economic governance.

In a statement after the third "taskforce" meeting, Mr Van Rompuy said ministers agreed that greater sanctions, including the potential suspension of EU farm and regional payments, were needed for states that repeatedly breached the bloc's budgetary rules.

"The scope of financial and non-financial sanctions will have to be widened, including in the community budget," said Mr Van Rompuy.

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