Euro banks rallied nicely on Monday after results of the EU's stress test indicated there are essentially no problems in the European banking system. The stress tests have been heavily criticized as a whitewash and a cynical PR maneuver however. Nevertheless, rallies in bank stocks are continuing today on earnings reports from UBS, Deutsche Bank, Societe Generale and Credit Agricole.
Of the 91 EU banks analyzed for the stress tests, only 7 failed - five in Spain, one in Germany and only one in Greece. No bank in Portugal, Ireland or Italy failed the test and was deemed to be in need of raising more capital. The 7 banks that did fail were supposedly only short $4.5 billion. An alternative result produced by an analyst at JP Morgan indicated at least 54 banks should have failed the stress tests and at least $100 billion in new capital needed to be raised. Even that view may be optimistic.
Although considering the great earnings out today for UBS (UBS), Deutche Bank (DB), Societe Generale and Credit Agircole perhaps enough money is being poured into the euro banks from the ECB that it is irrelevant what condition they are in. After all, another bailout is potentially always around the corner. The UBS earnings were the most telling in this regard. One reason stated for UBS doing so well was that "withdrawals in the private banking arm have continued to slow". Yes, losing business at a slower rate is certainly bullish. The stock was up 7% on the news.
In a separate report released today, lending to non-financial companies was down 1.9% year over year in the EU. So euro bank earnings are rising even though less lending is taking place to businesses. Interesting, to say the least. Mortgage lending in the EU is going up at a 3.4% annual rate however. So maybe some minor reinflation of the real estate bubble is taking place in Europe (NYSEArca: FXE) while the economy slows down. That certainly bodes well for the future.
The stress tests show once again that any number, no matter how outrageously manipulated or false, will be accepted by the market as gospel. We saw this last week with the UK second quarter GDP figures. The contraction spending number was up by an amount indicating a major building boom was taking place even though there is no other evidence of a big pick up in construction. The fact that the reported numbers didn't match up with reality apparently didn't disturb anyone. You would think it would have since the current EU financial crisis that necessitated the stress tests was cause by Greece lying about its fiscal state. Greece's numbers were off by more than 400%, but no one in EU headquarters noticed any problem with them.
When economic or business numbers are fantasies, but are accepted anyway, a major crisis will invariably follow. Before the Greek debt crisis, there was a the subprime crisis in the U.S. Bundles of subprime loans - loans from borrowers who had no job, no assets, and no history of paying their bills - were believed to be triple A credits because some authority said they were. This allowed common sense to be thrown out the window and complete absurdity to be regarded as wisdom. This type of behavior though isn't as bad right now as it was during the subprime era - it's actually much worse.
Disclosure: No positions.
Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21
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