Stephen Pope Comments: EU Bank Stress Tests Not Rigorous Enough

July 23, 2010, Moneycontrol.com

European markets were trading higher at 14:30 hours IST. Even the US index futures were up 0.5% ahead of stress test results of European banks. The CAC and the DAX gained 0.5%, while the FTSE was flat. United Kingdom's GDP data for the second quarter of CY10 came in better-than-expected at 1.1% (QoQ) and 1.6% (YoY). Forecasts had shown it at 0.6% (QoQ) and 1.1% (YoY).

In an interview with CNBC-TV18, Stephen Pope, Cantor Fitzgerald spoke about his expectations from the outcome of the European stress tests.

Q: What is the sense you are getting, should the market brace for a lot of bad news or is the market correctly anticipating that it is not going to be all that bad?

A: The market senses that when the results are released on an official basis rather than all the leaks we are getting from a country by country basis, you will find that there will be certainly a majority of banks tested with a passed. What I think we are really concerned about is that the test themselves have they been rigorous enough? And the answer to that is no.

I do believe that you are going to see questions asked about the Spanish banks because the caja, the savings banks in Spain do have a lot of difficulty, they are heavily involved in the real estate market within Spain which is a problem.

Also Spanish banks do own a vast amount of Portuguese debt. So to have these tests with no modeling of a sovereign default, whether it be Greece or Portugal or Spain or whoever. There is really a dereliction of duty by the central committee on the banking supervisors.

So we need to have far more rigour. But what we really want to have is a lot of transparency and that would allow analysts and various investment institutions to back test this, reverse engineer it and find out do they agree or do they disagree, and at what point do they disagree with the results that will be published today.

Q: So what is the sense you are getting that the results that will come today which of course no one can outguess but they will be looked at with a dose of scepticism and therefore going into the weekend we will see markets quiten down a bit?

A: Yes this is the situation that they will be looked at with a bit of scepticism. There has been a lot of debate about what time the result should have been released. We know it would be 6 pm Central European time, so 5 pm on British summer time. That means that European markets would have closed and participants would have gone home.

The argument is that this allows a time for reflection, absorption of results and what interpretation to make. However many of these banks do have American depository receipts trading. So you could see some very whippy action in non European liabilities of those banks because there is not full detail and disclosure.