27/07/2011 – European Bank Stress Test: “It’s not that 8 failed…but that 82 passed!!”

Indeed, this is something that European Financial Forecast readers

have known since the first stress test last summer.

For a unique perspective on Europe’s sovereign debt crisis, we

invite you to read a free 6-page report by Elliott Wave International’s

European Financial Forecast editor Brian Whitmer, “Credit

Crisis in Europe.” Brian has been anticipating and tracking

the credit contagion across Greece, Ireland, Spain, Portugal and

other EU nations for months.

Below is a quick excerpt from this report, written just after

the first stress test. For details on how to read it in full now,

look below.

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Credit Crisis in Europe: How the Stability of an Entire

Region is Teetering on the Edge of a Major Collapse

By EWI’s European Financial Forecast editor Brian Whitmer

(excerpt)

Panic Now and Avoid the Rush — July 30, 2010

The market’s collective sigh of relief is also reflected in authorities’

stress testing of 91 European banks. In case you missed last Friday’s

results, their message is clear: relax. The Committee of European

Banking Supervisors (CEBS) gave passing grades to nearly every

bank on its list. The group, for example, passed both Irish banks

and all four UK banks that it evaluated. The CEBS gave clean bills

of health to all four Portuguese banks, all five Italian banks,

and five out of six Greek banks that it analyzed. Even with share

prices that sit 29%-66% beneath their 2009 countertrend highs,

the CEBS says that the Bank of Ireland, Piraeus Bank, Banco Popolare,

and Banco Santander are all in good shape. In fact, just seven

of the 91 banks failed to make the grade. Five were in Spain,

one in Greece, and one, Germany’s Hypo Real Estate, is entirely

owned by the German government anyway. Everyone else — 84 institutions

in all — are supposed to be strong enough to withstand another

economic shock.

It’s not so much the stellar results that expose the optimism

of a Primary degree rally, but rather the Banking Committee’s

stress tests themselves. They are notable primarily because they

failed to test for any real stress in the first place. As the

chart shows, the Committee’s “adverse scenario” regarding

economic performance assumed a mere 3% deviation from the European

Commission’s GDP forecast. Another test looked at banks’ resilience

to a sovereign risk shock, yet the analysis merely used conditions

similar to those of May 2010. In other words, just like the UK

budget office, the CEBS is utilizing a woefully diluted version

of the economic deterioration that is about to grip the continent.

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FREE REPORT: Discover what Europe’s debt crisis means for the future of the continent and your investments. Get your FREE 6-page report filled with unique analysis on Europe, the PIIGS and the sovereign debt crisis. EWI’s European Financial Forecast editor Brian Whitmer gives you the context for what’s happening in Europe and gets you up to speed on the reality of the situation. Download your free report now.