Wednesday, July 28, 2010

EU Banks’ Stress Tests: Redundancy in Accountancy?

Despite of being labeled as “too soft” by leading economists, are the recent EU banks’ stress tests really capture the big picture of the Eurozone’s current economic health?

By: Ringo Bones

The recent EU banks’ stress tests, which are conducted by independent auditors – which publicized its findings last July 23, 2010 – showed that of the 91 major Eurozone banks evaluated, only 7 had failed the stress tests. Germany’s Hypo Real Estate failed, which is not surprising given the bank’s exposure to bad credit at the height of the 2008 global credit crunch. Also, one Greek bank failed, while 5 of Spain’s banks under evaluation had failed to pass muster on their survivability of an economic downturn scenario that was deemed “too soft” by leading economists. But does the recent EU banks’ stress tests really tell the true economic picture of the whole Eurozone?

Or could it be that the problem is not economic or even fiscal in nature, but of the way the ailing Eurozone countries make concessions with their left-leaning trade and labor unions during the past 40 years? Unfortunately, from outsiders’ perspective, the Costa-Gavras’ Z has been taken, by most people, as a factual historical “documentary” of post World War II Greek society. That is incumbent governments’ buying the loyalty of their local left-leaning labor and trade unions’ loyalties using concession that endanger their countries long-term sovereign economic viability.

Most of Spain’s Caja banks that have just barely passed the recent EU banks stress test are also on the verge of bankruptcy because of Spain’s “past sins”. Various Spanish administrations since the Franco dictatorship had been making overly generous concessions with Spain's left-leaning trade and labor unions with scant regard to existing economic conditions. It is now very expensive to lay-off a worker in Spain then paying the required benefits.

Bank stress tests and quanititative easings had neither addressed the problems of Eurozone’s socialist model of employment benefits nor reformed them over the years to make them congruent with prevailing economic conditions. In the end, the annual EU banks stress tests may not only be seen by the world’s leading economists as too soft and not designed to cope with another 2008-era credit crunch, but also just another redundancy in accountability. Independent auditors have other and better things to do by the way.

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