Spain optimism and stress tests boost euro assets

By Jonathan Gleave and Jan Strupczewski

MADRID/BRUSSELS (BestGrowthStock) – Europe’s single currency headed for its strongest weekly gain in over a year on Friday as concerns about Spain’s financial health eased and the bloc detailed plans to unveil stress test results for its banks.

International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn gave the Spanish government a vote of confidence, saying on a visit to Madrid that its reform plans went “absolutely in the right direction.”

The comments and Spain’s readiness to make public resilience tests for its banks allayed concerns the country might have to tap a 500 billion euro ($613.2 billion) safety net set up to halt contagion in the euro area after a bailout of Greece.

The euro held near a three-week high against the dollar close to $1.24, well above the four-year low of $1.1876 it hit on June 7 and good for a weekly gain of about 2 percent — its biggest since May 2009.

The risk premium that investors demand to hold Spanish debt rather than German benchmark bonds fell to 192 basis points after hitting a euro lifetime high of 238 on Thursday and Spanish stocks rose 2.2 percent, lifted by a rally in bank shares.

“There has been a slight change in sentiment,” said Mike Lenhoff, chief strategist at Brewin Dolphin Securities in London. “It looks like the policy effort is beginning to come to fruition.”

European Commission President Jose Manuel Barroso, speaking in Florence, said tests of whether EU banks had sufficient capital to cope with financial shocks would be broadened to include “much more” than the 25 large institutions officials said would be examined at a Brussels summit on Thursday.

EU leaders agreed to the move after Spain and France threw their weight behind the idea, promising to disclose the tests on a bank-by-bank basis by the end of July.

“If well executed, we think this is likely to help market confidence, although there are still plenty of open questions about how definitive these tests will be,” Morgan Stanley analysts said in a research note.

Among those questions was whether countries would be able to force reluctant banks to disclose financial details they would prefer to keep secret. German law, for example, prohibits this.

Pressed on the issue, German Finance Ministry spokesman Michael Offer conceded that Berlin could not compel banks to reveal test results, but hoped that peer pressure would convince them to be transparent.

It was also unclear what criteria regulators would use to perform the tests.

A French official said scenarios used in tests so far did not include the risk of a sovereign default or debt restructuring in the euro zone.

A senior euro zone source said the tests would simulate a slowdown in growth and stress on sovereign holdings. Bundesbank President Axel Weber has urged Europe to proceed with a new set of tests that would include more drastic downside scenarios.

OBAMA LETTER

The United States has been urging Europe to press ahead with transparent assessments of the health of its banks, a strategy used successfully by the President Barack Obama’s administration to restore faith in Wall Street firms in the midst of the global financial crisis in 2009.

In a letter to fellow G20 leaders published on Friday, Obama pressed Europe to do more to address uncertainty over bank balance sheets. He also called on other major economies to boost private sector demand, just as Germany is pressing EU partners to implement strict austerity measures.

The EU conducted a stress test of its entire banking sector last year, but until now had resisted pressure to break down the results by country or bank.

While such tests could restore investor confidence in some banks, they could also force governments to recapitalize those that remain fragile — a move that would be highly unpopular at a time when citizens across Europe are facing steep budget cuts.

“Under no circumstances would a bank that may be under distress be left out in the cold,” the euro zone source said.

Spain’s largest bank Santander, whose shares rose 3.5 percent on Friday, has said it expects stress tests to show that the vast majority of the country’s banks are strong.

“Publishing the stress tests for our financial entities is the answer to seeking more confidence. There is no better recipe for generating confidence than transparency,” Spanish Prime Minister Jose Luis Rodriguez Zapatero said after talks with Strauss-Kahn.

Zapatero, who faces acute pressure from unions, said he was not contemplating new measures beyond the 15 billion euros in spending cuts, labor reforms and other measures his government has already announced.

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(Additional reporting by Stephen Brown and Sarah Marsh in Berlin, Jonathan Gleave, Sonya Dowsett, Fiona Ortiz in Madrid; Writing by Noah Barkin)

Spain optimism and stress tests boost euro assets