Credit rating agency Standard & Poor’s has joined the chorus of dissatisfaction with Europe’s bank stress tests, saying the risk of sovereign default should have been a factor in the tests.
The tests, released Friday after trading, found that just eight out of 90 banks tested would have insufficient Tier 1 capital in an adverse economic scenario. But GFS News, which covers financial regulation, quotes an S&P report saying Europe’s shaky financial institutions depend on a government infusion of capital, support which could be undermined by a sovereign default.
“Of the €1 trillion ($1.4 trillion) of core Tier 1 capital held by the 90 banks stress tested at the end of 2010, 16 percent had been provided by governments or other public sector entities,” S&P credit analyst Richard Barnes said.
European and world markets have been rocked for two years by fears of a sovereign default, yet the European Banking Authority’s stress scenario did not include the possibility of a sovereign default by Greece, Portugal, Spain or Ireland. Eurozone leaders gather Thursday in an emergency summit meeting on the debt crisis in Europe, where a default by Greece is considered imminent barring a large-scale and politically complicated bailout.