Wednesday, July 7, 2010

European "Stress Test" to Mark Down Sovereign Debt

It's funny to see Europeans feigning to take their "stress test" seriously, despite Timmy Geithner's numerous visits to Europe telling them all they need to do is what he did in the US, a sham of a test - neither "stress" or "test" - to restore CONfidence.

But are Europeans really saying thanks Timmy but no thanks, and actually planning to put some "stress" in the test?

Reuters reports:

"FRANKFURT/BRUSSELS (Reuters) - Stress tests on European banks need to mark down the value of Greek government debt by about 16 percent, sources said, as regulators haggled over how much detail to reveal about the health checks.

"... Two German banking sources said a haircut of 16 to 17 percent off the market price would be applied to Greek debt. Greece's 10-year bonds are trading at about 75 percent of their par value at present.

"No haircut would be applied to German sovereign bonds, the sources said, and a 0.7 percent markdown would be applied to French sovereign bonds, one of the sources said.

"Sovereign bonds of Portugal, Spain, Italy and Ireland would see more significant markdowns, the sources said.

"A 3 percent loss will be applied to Spanish bonds, Bloomberg reported." [Emphasis is mine. The article continues.]

Hmmm. Greek sovereign debt is already trading at 25% haircut, and the "stress test" will only do 16% haircut. Maybe not much of a "stress" after all. And 3% for Spanish bonds? There you go, that's more like Geithner's stress test...

For a moment I thought Europeans were serious.

JPMorgan thinks it's a joke, and Reggie Middleton has this eloquently titled article on his Boom Bust Blog: "Greece Starts to Restructure in Real Time, Exactly As We Predicted – Rendering EU Stress Tests As Credible As Platinum Laced Frog Farts".

Hahahahahahahahahaha ........ (whatever that means, it sure doesn't sound credible.)


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