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Busch: Stress Tests Watered Down

The over-under for the European bank stress testsare 12 out of 91 fail the tests and need capital injections. Unlike the US stress tests, the European tests didn’t tell us the metrics or guidelines before the tests were run. This has generated uncertainty over exactly how these banks are going to perform.

Today, most of this should be resolved.

Key metrics not used: a default by Greece and not stressing the hold-to-maturity bond portfolios of sovereign debt.

My take is this: how many Greek banks fail?

If there is no Greek bank failing the test, then how good can the tests be? If they didn’t test for a Greek default, what value will the result be? Also, the outcome has a pre-determined feeling to them that means they will show better than expected results. This is an exercise of kicking the can down the road and hoping tax receipts will rise when the economies of Europe rebound.

"This is an exercise of kicking the can down the road and hoping tax receipts will rise when the economies of Europe rebound." -BMO Capital Markets, Andrew Busch

This push-out strategy is similar to one that the United States is pursuing. However, the US is still spending and increasing the deficit. The sound you hear today from the extension of the jobless benefits will be one of red ink rising. The fact that Washington decided not to use unspent stimulus money to pay for this extension is striking compared to the austerity plans coming out of Europe.

The interesting development is that the strategy may work. Today, the UK announced strong than expected Q2 GDP of 1.1% and Germany announced their IFO business climate index jumped to 106.2 vs expectations of 101.5. These indicate Europe’s economic expansion may be stronger than forecast.

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

This is the best news for the banks in Europe that are being stressed.

Overall, markets await the release of watered-down results that will need further scrutiny and likely produce more uncertainty.

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Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch.

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