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 yesterday.
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 percent to 1 percent higher.
The euro held on to its gains from Friday.
However, skepticism 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, in 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 percent at 5:50am GMT. It was still down about 7 percent from its year-to-date high in mid-April, in part over concerns that debt defaults in the eurozone could derail the global recovery.
By 6:02am GMT, futures on the STOXX Europe 50, Germany’s DAX and France’s CAC were up 0.6 percent to 0.9 percent.
Financial spread-betters expected Britain’s FTSE 100 to open as much as 0.8 percent and their call on the DAX and France’s CAC-40 largely reflected futures pricing.
The euro was changing hands at about US$1.2910, little changed from US$1.2916 in New York on Friday.
Fears of a eurozone debt crisis and its impact on European banks had driven the euro below US$1.19 last month, its lowest since 2006. However, it began a swift recovery this month and hit a 10-week high above US$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 euros (US$38.7 billion) to 100 billion euros, 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.
Stronger-than-expected economic data and business confidence surveys suggesting the eurozone would 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 percent 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-percent drop in stock markets and sharp rises in interest rates.
While the tests were criticized as too lenient, the wealth of data disclosed by banks representing 65 percent of Europe’s banking assets, and the commitment of banks, regulators and governments to follow up action, may outweigh the skepticism.
EU authorities were chastised for refusing to test the impact of a debt default by Greece. However, 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.”
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