Europe eyes quick move on stress tests

 

Germany joined major European partners on Thursday in backing the publication of bank "stress tests" and the euro rose on a successful Spanish bond sale as EU leaders met to agree on tighter budget rules.

Berlin, which had been sceptical about revealing details of tests on the financial health of its banks, dropped its objections after both France and Spain came out in favour of a move the Obama administration has pressed Europe to take.

"Germany is positive on the idea of publishing the results of EU stress tests" said Finance Ministry spokesman Michael Offer. "We see that markets are unsettled and that confidence among banks has taken a hit."

Earlier French Economy Minister Christine Lagarde, speaking to Reuters Insider television in Paris, had thrown her weight behind rapid publication of stress tests, saying French banks had strong balance sheets and nothing to hide.

The run-up to Thursday's EU summit in Brussels was dominated by concern that Spain, the euro zone's fourth biggest economy, might be forced to tap a 500 billion euro (418 billion pound) EU safety net set up to halt contagion after a bailout of Greece.

But leaders sought to play down Spain's troubles and said the country was not on the agenda at the one-day meeting.

Markets across Europe received a boost when Madrid succeeded in selling 3.5 billion euros in 10- and 30-year bonds, squeezing investors who had shorted the single currency.

The euro shot towards $1.24, its highest level in three weeks, and the premium investors demand to hold Spanish bonds rather than German benchmark issues narrowed from a record high of over 230 basis points to 212.

European shares gained for a seventh straight session, riding bullish bank shares to a near five-week peak.

"The strong demand for Spanish bonds should help restore confidence" said Ciaran O'Hagan, a strategist at Societe Generale.

To reassure investors, Spain, France and other euro members have announced a flurry of austerity measures and structural economic reforms in recent days, helping the euro recover from four-year lows against the dollar.

LESS STRESS

The publication of bank stress tests could also help calm jittery investors as long as the results don't reveal unexpected holes in banks' books. A European Union source told Reuters the tests would not be unveiled this month, but both France and Spain said the sooner they were out there, the better.

"If someone suspects you have an illness, it's all very well to say 'No, no, no I'm very healthy,' but it's even better if you say 'OK fine, take my blood and make sure that I'm healthy'" Lagarde said, saying the results should be made public ideally before the end of July.

Germany, home to regional Landesbanken that were hit hard by the global financial crisis and have yet to fully recover, had been concerned it could be forced to recapitalise ailing institutions.

European Central Bank Governing Council member Erkki Liikanen said trust would return if the stress tests were made public and his French colleague Christian Noyer said they should be broken down by country and bank.

At their summit, the EU leaders hope to overcome differences on how to strengthen budget discipline and economic policy coordination to convince financial markets they can prevent a repeat of the debt crisis which started in Greece.

German Chancellor Angela Merkel and French President Nicolas Sarkozy reached a compromise after talks in Berlin on Monday, pledging unity to defend the euro in the worst crisis since its founding 11 years ago.

Sarkozy bowed to German demands for tougher budget rules and accepted that euro zone states which persistently breach deficit limits should have their voting rights in the bloc suspended, even if that requires treaty changes.

He also accepted at Merkel's insistence that all 27 EU member states and not just the 16 that share the euro, should be involved in "economic government" to coordinate policies and he dropped French demands for dedicated euro zone secretariat.

The leaders were also expected to try to agree a common EU stance on a bank levy and financial transaction tax ahead of a G20 meeting on June 26-27, but may struggle to win support for those measures from other G20 members, including host Canada.

UNPOPULAR REFORMS

On Wednesday, Spain and France announced politically unpopular labour and pension reforms in the face of financial market pressure on euro zone states to clean up their finances.

Both are the sort of structural reforms recommended by the executive European Commission and by economists to adapt European economies to global competition and an ageing population, and to make public finances more sustainable.

But they face opposition from trade unions which see them as an assault on workers' rights and plan protest strikes.

"Spain has adopted a very courageous package of fiscal measures and now it has also presented labour market reforms which are important" OECD chief economist Pier Carlo Padoan told reporters in Rome. "Its situation is difficult but completely manageable."