It is an intriguing paradox. Financial markets are notoriously distrustful, ignoring even the most solemn pledges of European politicians regarding their intention to help out debt-laden countries as needed. At the same time, however, the gullibility of traders appears unlimited on occasion -- all it takes is the whisper of a rumor and indexes spike upwards or, more often, plunge into the depths.
Spain, this week, has been victimized by both tendencies -- which is why Germany now appears to be reversing course and supporting Madrid's calls for the results of banking stress tests carried out on major European banks to be made public.
According to an article in the Financial Times Deutschland on Thursday, Berlin is prepared to buck the intense opposition of German financial institutes and back the publishing of stress-test data. The report was confirmed by a Finance Ministry spokesman on Thursday.
News of the course change comes a day after the governor of the Bank of Spain, Miguel Angel Fernandez Ordonez, said that Spain would move forward on its own even if the rest of Europe did not. The central bank, he said, "plans to disclose stress-test results ... so markets can perfectly assess the situation of Spain's banking system."
Fretting About Health
Madrid's push to reveal the results of the tests stems partially from a German media reports earlier in the week and repeated in Spanish business paper El Economista on Wednesday that the EU, the International Monetary Fund and the US Treasury were assembling a €250 billion ($335 billion) credit line for Spain. Both Spain and the European Commission were, however, quick to deny the rumor.
Berlin and the European Union are currently working on a unified position, an anonymous government source told the Financial Times Deutschland. That position could even be reached at an EU summit meeting which began on Thursday in Brussels.
Similar to those carried out in the US, the European stress tests, which were performed last year, took a close look at 22 of the largest financial institutions in the EU to determine how they might weather economic downturns of varying severity. The results of the individual tests have remained under lock and key, though it was announced that the banks were "sufficiently capitalized." A further round of testing began in March.
German banks have been vehemently opposed to publishing the results of individual stress tests for fear that various balance-sheet details could lead to confusion or misinterpretation. The US published the results of its banking stress tests a year ago in a move that has widely been credited for helping to unfreeze US financial markets. US Treasury Secretary Timothy Geithner has urged Europe to provide as much transparency as possible when it comes to stress-test results.
Far from a Given
Spain is hoping that a publication of stress-test results will prove to investors that "all (Spanish) banks have sufficient capital to cope" with a variety of economic growth scenarios, said Ordonez. The stress tests did not encompass the myriad smaller banks in Spain that have suffered mightily due to their exposure to the country's struggling real estate sector.
Investors are worried that a heavily indebted Spain could follow in the footsteps of Greece, whose debt crisis has carried it to the very brink of bankruptcy. In response to the growing concerns, Spain passed a far-reaching austerity package last month aimed at reducing the country's budget deficit, which currently stands at 11.2 percent of gross domestic product.
On Wednesday, the Spanish cabinet pushed through labor market reforms aimed at adding flexibility to the country's calcified job market. The changes met with widespread approval within Europe, but will eventually have to be cleared by parliament. Given that parliament almost blocked last month's austerity program, the passage of the labor reform package is far from a given.