Monday, October 1, 2012

As predicted, analysts claim that Spain's stress test understated capital needs

As predicted by your humble blogger, in the absence of Spain's banks providing ultra transparency, analysts have concluded that Spain's banks need far more capital than the stress tests show.

The Telegraph reports that Moody's thinks Spanish banks might need over 100 billion euros (not exactly going out on a limb when some analysts were predicting 300+ billion euros several months ago).
The agency said banks would need between €70bn and €105bn “to maintain stability”.
What Moody's announcement did do is to undermine the credibility of the stress tests and open the floodgates for higher estimates of capital needs.

With these higher estimates in hand, Spain will do a loan by loan stress test and conclude that the average of these estimates is the amount of capital Spain's banks need (provided of course that Spain could find this capital; otherwise, the result will be lower).

Of course, this stress test will also not restore confidence in the Spanish banking system.  It won't restore confidence for the simple reason that there is still not ultra transparency and market participants cannot independently confirm the stress test results.

With no ability to confirm the results, analysts will assume that there is sometime to hide and predict even higher capital needs.  To date, this strategy has been successful in Ireland and Greece.  There is no reason to think that Spain will be different.

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