Cantor Fitzgerald

Stephen Pope Comments: EU Stress Tests May Include 17% Loss On Greek Debt

July 7, 2010, Bloomberg BusinessWeek

European Union banking regulators have told lenders that their planned stress tests may assume a loss of about 17 percent on Greek government debt and 3 percent on Spanish bonds, according to two people briefed on the talks.

There are unlikely to be so-called haircuts on German government securities under the stress tests being overseen by the Committee of European Banking Supervisors, said the people, who declined to be identified because the talks are private. CEBS will likely delay publication of the stress-test criteria until tomorrow, an EU official familiar with the talks said.

Regulators are counting on the tests to reassure investors that banks have enough capital to withstand a debt default by a European country. U.S. bank stocks rebounded last year after government analysis of their balance sheets found that 10 lenders needed to raise $74.6 billion of capital.

“This sounds like the softest option possible,” said Stephen Pope, London-based chief global equity strategist at Cantor Fitzgerald. “If that is the indicator how stringent the stress tests will be, then they aren’t worth too much.” Regulators should be applying a haircut of 20 percent on Greek debt and 7 percent for Spanish debt, he said.