“Omega-Trading”– EU Stress Tests Must Exude Credibility …

“Omega-Trading”: The results of the EU’s bank stress tests have the potential to cause another credit crunch.

“The Eurozone’s banks are damned if they do and damned if they don’t”, according to analysts at “Omega-Trading”. The comments were apparently made in the latest emailed newsletter to clients as part of the firm’s assessment of the likely fallout from the publication of the results of stress tests carried out on the Eurozone’s largest banks.

“Omega-Trading” says that, first and foremost, the tests need to be seen to be credible. They argue that if too many banks “come out smelling of roses”, the tests will be regarded as a sham and a whitewash leading investors to conclude that the test subjects are hiding horrors on their balance sheets.

Conversely, the firm says that if the tests reveal worse-than-feared problems at one of the more important banking groups, there could be serious implication for the system as a whole. As seen in 2007/08, this loss of confidence could trigger another credit crunch and tip the world back into recession.

“Omega-Trading” analysts believe that the European authorities will have no choice but reaffirm their commitment to providing short-term funding for the banks should the worst of the problems exist outside the “usual suspects, Greece, Spain and Italy”.

The upcoming publication of the Eurozone’s stress test results is a big moment. The likelihood is that a number of banks in Greece, Spain and Italy will be shown to be extremely vulnerable – to say nothing of some deeply indebted German Landesbanken.

If they don’t, the tests will be dismissed as a whitewash – and the markets will fear the worst, assuming even more serious problems lurk on bank balance sheets. But if the tests do pull the rug from under a few significant banks, that could provoke wider systemic concerns. It is an extremely difficult balancing act for the European authorities to pull off – and one that is almost certain to be met with considerable market volatility.