EU to publish stress tests showing potential bank losses in July

EU to publish potential bank losses

BRUSSELS — European Union leaders agreed Thursday to go public with the results of “stress tests” checking the stability of the bloc’s banks, an attempt to restore confidence to markets spooked since Greece demanded a bailout to prevent an embarrassing default.

Markets welcomed the news with the euro climbing to about $1.24, its highest in about three weeks, and stock markets rising.

Despite market fears that Spain may be the next country to need a rescue plan, EU leaders meeting at a summit of the 27-nation bloc in Brussels insisted that they are not worried.

French President Nicolas Sarkozy said, “We don’t believe there is a problem, and that’s the analysis of all 27 of us.”

Under intense pressure from markets and other EU nations, Spain is pushing through budget cuts and labor reforms that Spanish Prime Minister Jose Luis Rodriguez Zapatero claimed would prevent new redundancies and would encourage companies to hire more workers.

Spain is also trying to stem speculation that it could follow Greece in requiring financial aid to rescue its banking system by announcing it would test how well its major banks could cope with more losses if the economy worsens and house prices tumble further. Its move inspired the EU’s broader decision to publish banking stress tests.

In a sign markets are worried about Spain, investors charged the government sharply higher interest rates at a Thursday bond auction that raised €3.5 billion ($4.3 billion.)

Zapatero called for “demanding” tests across Europe to prove that the region’s banks could weather any new crisis.

“There’s nothing better than transparency to demonstrate solvency, to give confidence and to leave all these unfounded rumors behind us,” he told reporters.

European President Herman Van Rompuy said the results of the tests on each of the Europe’s 25 biggest banks will be released in the second half of July.

The U.S. published stress tests in 2009 to show how much capital the country’s 19 biggest banks needed to raise to cope with more losses.

Such tests give an estimate of what potential losses financial institutions could be facing. If a result shows that an institution can’t cope with necessary write-downs in case of a worsening market environment, the bank is required to put more money aside to counter the extra risk.

German Chancellor Angela Merkel says she will overcome opposition from some banking executives, who cite legal concerns about making the results public.

“We have the intention to publish it and we will find ways,” she said, according to DAPD news agency.

Marco Annunziata, an economist at UniCredit bank, said Europe needs “to finally clear the air on the health of its financial system” and that greater confidence in Spain’s financial system could bolster market optimism for the entire eurozone.

The stress tests could calm volatile markets worried about Europe’s soaring debts — both public and private — after a massive “shock and awe” €750 billion ($1 trillion) financial rescue package for indebted EU nations failed to put an end to fears of a deeper crisis in the region.

Spain’s total debt, both public and private, could top €300 billion, economist Daniel Gros estimates, and markets are treating the government as if it had debt far above its fairly prudent level of 64.9 percent of gross domestic product this year. It also has the highest jobless rate among the 16 nations that use the euro.

EU leaders agreed to bring in more sanctions to discourage member nations from running up debt as they toughen budget rules and introduce wider oversight of their economies to force governments to tackle problems that hold up growth.

British Prime Minister David Cameron said he would not accept any sanctions for his country because it does not plan to join the euro. Nor does he want to discuss his budget plans with other EU governments and the European Commission before they go to the national parliament.

Governments pledged to follow a 10-year strategy to boost research spending and education as Van Rompuy warned that they needed to make deep reforms to avoid sluggish growth that could stop them paying for expensive welfare systems.

Also at the summit, EU leaders called on the U.S. and others to “explore and to develop” a global tax on financial transactions at a Group of 20 summit of rich and emerging nations in Toronto next week.

The tax isn’t popular outside Europe, and it is still unclear how it would work worldwide — and if Europe could introduce it alone without damaging its own economy by causing financial groups to flee the region.

Van Rompuy said leaders had already decided in principle on introducing a levy on banks in Europe to “contribute to a fairer burden sharing of the costs of the financial crisis and to greater stability of the financial system.”

However, EU nations do not agree on how the money raised would be used. Sweden already has a levy that feeds into a fund for future bailouts; Germany is also considering a similar system. Both France and Britain say any money raised should go straight to governments.

Associated Press writers Robert Wielaard and Sylvie Corbet in Brussels contributed to this story.