Singapore/Paris: Investors took some reassurance that European banks had passed “stress tests” on their ability to deal with a debt crisis, prompting European stock futures prices to rise on Monday.
Shares rose in Asia as the worst fears about the tests were assuaged and European markets were set to follow suit with spread betters calling for British, German and French stock markets to open as much as 0.8% to 1% higher.
The euro held on to its gains from Friday.
But scepticism remained about the credibility of the tests because they showed a combined capital shortfall of the 91 banks put under the microscope that was much smaller than expected.
“On the surface, if anything, you have to take these tests with a pinch of salt,” said Jonathan Cavenagh, currency strategist at Westpac, Sydney. “Sovereign debt problems remain, funding constraints for their banks are still there and these have the potential to weigh on the euro.”
The MSCI Asia Pacific Index was up 0.5% at 11:20am. It was still down around 7% from its year-to-date high in mid-April, in part over concerns that debt defaults in the euro zone could derail the global recovery.
By 11:32am, futures on the STOXX Europe 50, Germany’s DAX and France’s CAC were up 0.6% to 0.9%.
Financial spreadbetters expected Britain’s FTSE 100 to open as much as 0.8% and their call on the DAX and France’s CAC-40 largely reflected futures pricing.
The euro was changing hands around $1.2910, little changed from $1.2916 in New York on Friday.
Fears of a euro-zone debt crisis and its impact on European banks had driven the euro below $1.19 last month, its lowest since 2006. But it began a swift recovery in July and hit a 10-week high above $1.30 last week.
Only seven of 91 banks failed the stress tests -- five small Spanish banks, Germany’s state-rescued Hypo Real Estate and Greece’s ATEbank. No listed bank failed.
Financial markets had expected a shortfall of €30 billion to €100 billion, although many European banks had already raised capital during the financial crisis.
The relatively placid exercise in Europe was a far cry from the high anxiety in early May over Greece’s debt crisis that reverberated in global markets over concern it could spread like wildfire through Europe and beyond.
German Chancellor Angela Merkel said then that Europe’s fate was at stake. France declared the euro was under speculative attack. Violence erupted on the streets of Athens over the Greek government’s austerity measures to deal with the crisis.
But stronger-than-expected economic data, and business confidence surveys suggesting the euro zone will avoid a double-dip recession despite fiscal austerity measures, were helping to revive investor confidence in Europe.
More than a dozen banks barely passed the tests, with just over the required 6% of Tier 1 capital in the most stressful scenario, and are likely to come under market scrutiny.
The stress test scenarios included how banks would cope with a double-dip recession, a 20% drop in stock markets and sharp rises in interest rates.
While the tests were criticised as too lenient, the wealth of data disclosed by banks representing 65% of Europe’s banking assets, and the commitment of banks, regulators and governments to follow-up action, may outweigh the scepticism.
Given the haggling among EU governments and regulators about the tests right up to the last moment, the degree of transparency was greater than had been expected a few weeks ago.
Sources familiar with the discussions said Germany fought hard behind closed doors to limit the extent of disclosure.
In the end, most banks - except Deutsche Bank - issued a detailed breakdown of their exposure to the sovereign debt of EU countries, enabling investors to run their own risk simulations to gauge a counterparty’s solidity.
That should help reopen the interbank lending market, which partially froze at the height of the euro-zone debt crisis and has remained tight on fears banks have been hiding big exposures.
EU authorities were chastised for refusing to test the impact of a debt default by Greece. But European Central Bank governing council member Christian Noyer said euro-zone states “have put several hundreds of billions of euros on the table with the support of the IMF to make this hypothesis completely excluded”.
Economist Nicolas Veron of the Bruegel think-tank said the success of the exercise would depend partly on whether European regulators adopt a more cooperative approach after the stress tests than they did before them.
“If this is the start of a beautiful friendship among EU supervisors, then that’s not the same as if the united front crumbles next week and they start criticising each other again.”