The European Banking Authority has issued a directive to European banks to–as CNBC put it–”stress their portfolios for ‘more conservative assumptions.’ ” Unfortunately, the stress tests do not involve the possibility of Greece defaulting! Some excerpts from a Bloomberg story available here:
- “Credit default swaps indicates an 82% chance Greece will fail to meet its commitments within five years.”
- “The EBA can’t include a sovereign default in the stress tests because that would lend credence to the possibility of such an event happening and undermine confidence in the region, said Richard Reid, an economist at the London-based International Centre for Financial Regulation.”
In hindsight, the credit default swaps for Bear Stears indicated the same thing, something that was highlighted in a posting of his on March 8, 2008. So, it would be like instructing U.S. bank, in early 2008, to run scenarios against their portfolios, but scenarios that do not include a Bear Stearns wipeout.
Here’s a look at the pricing on Greece debt default protection. It’s up between 30-40% this week alone.
And this is what happens when the Greek government tells its citizenry that austerity measures are needed.
But, no, European Banks, there’s no need to factor in the possibility of Greece defaulting on its debt.