But I am much less impressed with the stress tests. The EBA has made exactly the same mistake that it made in previous tests: it has ignored the real risks facing the EU.
•Baseline inflation for the Eurozone is supposed to be 1.0%: currently it is 0.3% and falling. Only one country (Greece) has a baseline of outright deflation: but four countries in the Eurozone and several more in the wider EU are currently experiencing price falls. The “adverse scenario” for inflation in 2014 only has Greece and Sweden experiencing deflation: we are already way beyond that. “Adverse”, it seems, can't admit the possibility of deflation.
•Baseline annual GDP growth for the Eurozone is supposed to be 1.2%: currently it is 0.8% and falling. Amusingly, the “adverse scenario” for 2014 was a fall in annual GDP growth of 0.7%. “Adverse”, it seems, is reality.
•Baseline unemployment figures are shocking. Are we to regard double-digit unemployment in much of the EU as normal? Astonishingly, the “adverse scenario” for Greece and Cyprus actually showed unemployment falling. “Adverse”, it seems, is not as bad as where we have already been.
•Finally, and most worrying of all, the sovereign bond yield rises in the “adverse scenario” are far smaller than the yield spikes seen not only in the Eurozone periphery, but also in emerging Europe in the last decade. Do we believe that the horrors of the past will never return again? I thought this was supposed to be a severe test. “Adverse”, it seems, dare not admit that bond yields might still rise sufficiently to threaten the end of the Euro and the breakup of the EU.
To be fair, the baseline and adverse scenarios for each country were published in April 2014, when the EU was forecasting a recovery that has so far failed to materialise. But surely the baselines, at least, should have been updated when it became clear that they were unrealistic? Eurocrats' magical thinking about inflation and growth (both will return ANY DAY NOW) has invalidated the stress tests.
So my conclusion is that this exercise is, like the proverbial curate's egg, good in parts. It has undoubtedly improved transparency and prudent asset valuation. But it has not proved that the banking system is resilient to even the current downturn, let alone a future one.
Thursday, October 30, 2014
Publicada por Miguel Madeira em 14:26