Spain/Italy – Stress tests lack credibility & Berlusconi makes a comeback? – Analyst Insights

Interview with Matt Lasov, Head of EMEA Research for Frontier Strategy Group

Spain –Take today’s banking stress test results with a grain of salt because the hired consultants were not permitted to audit the banks directly and instead could only review Spanish central bank records. These are the same records that showed Bankia earning a profit, not a multibillion euro loss. Bizarrely, the government also hired the big four to audit the banks directly, but those results are not set to be released publicly.

Regardless of the opacity surrounding the stress test, one thing we have learned is that the capital needed after stress tests has tended to be 2x or 3x the stated amount. This was the case in the US (take Citi, or Bank of America for example) and has been the case in Europe. Be wary of the results.

Italy – There are concerns that Berlusconi will use an anti-austerity platform to reshape government and regain power. Berlusconi has been completely out of the political spotlight as his reputation recovered. He chose these comments to mark his return:

“The day we stop supporting this technical government, we will recover a lot of votes”

“If we continue on with the policies of Signora Merkel,” Mr. Berlusconi said referring to German Chancellor Angela Merkel, “We will end up in a worsening recessionary spiral. This is really the wrong policy.”

Berlusconi still has a tremendous amount of power in Italy and is the leader of the party that backs Monti’s technocratic, unelected government. Any moves in the opposite direction will roil markets, as the Italian government loses credibility.

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