The Great Debate

Europe’s long summer holiday still has a week to run but this year’s reentry will bring with it evidence that very little progress has been made on the issues that threaten to rend the currency union and upend the global economy.

Despite waving the stress-test magic wand over its banks in late July the same problems continue to grow unchecked: a euro zone periphery that can’t compete, may not be able to pay its debts and so may bring down with them the very banks that have been pronounced healthy.

While the German economy is growing at a rate not seen since the Berlin Wall came down, things are a good bit worse in Ireland, Portugal, Spain, Italy and especially Greece, all of which face some combination of an austerity-induced recession and debts public and private which which threaten their banking systems, local governments and Treasuries.

Investors have looked at this on the one hand and on the other a $1 trillion bailout, a pliant International Monetary Fund and the results of the stress tests and have voted with their feet: average spreads between German and peripheral country bonds are back in territory last seen in June and heading north. Ten-year Greek bonds now yield 861 basis points more than German issues, or about where they were in May when we were all debating the chances of the euro surviving in its current form.

Irish bonds too have underperformed alarmingly as austerity without debt rescheduling does what austerity without debt rescheduling does: kills growth and kills the prices of assets the debts are secured upon, leaving the country less able to service its debts and more likely to default even harder. Yes, defaults are like sneezes; some are polite and soft and some splatter everyone in the room.

- Laurence Copeland is a professor of finance at Cardiff Business School. The opinions expressed are his own.-

Worries about Europe’s banking system go back at least to 2007, but whereas the U.S. (and UK) banks appear to have weathered the storm, there are fears that for European banks the worst may lie ahead.  Concerns centre on four areas.

First, there are obvious worries about Greece and the other small countries facing debt problems, notably Portugal and Ireland, where the local banks have lent heavily to their governments and in addition may need to make provision for a substantial build-up in the level of bad debts in their respective corporate sectors as their economies struggle through the recession.

How are European officials orchestrating the bank stress tests like Pacific islanders speaking into coconuts and waiting for cargo to drop from the skies?

They both make the elemental error at the heart of all cargo cults; they mistake necessity for sufficiency and hope that imitation and affect will make up for a lack of substance.

Most often associated with the south Pacific after World War II, cargo cults are religions whose practitioners try to use magic to produce the results of more powerful technologically sophisticated cultures.

– Leo Apotheker, co-CEO and member of the executive board of German software maker SAP AG, is a guest columnist. The views expressed are his own. —

The U.S. government’s recent bank stress tests were all about clarity. With hard data and clear facts, they shone a bright light on the shadowy uncertainties of complex financial transactions.

The question now is: Will this sort of clarity be a part of doing business in the financial industry?

– Mark Hannam is a guest columnist, the views expressed are his own. He formerly worked at the Bank of England and Barclays. He is currently chairman of Fair Finance, a microfinance company –

Some banks have come out of the financial crisis in better shape than others. We should encourage them rather than lump them together with the failures.

Public anger at the recent failings of many of our leading banks, while justified, is not a sound basis for future policy. The temptation facing policy makers — that of failing to distinguish between better capitalized, better managed banks and under-capitalized, poorly managed banks — should be avoided.

– James Saft is a Reuters columnist. The opinions expressed are his own –

Whatever the results of the stress test are, increasing levels of tangible common equity (TCE) should be at the heart of the response. That implies painful and dilutive capital raisings to come, and not just for the banks being tested.

U.S. regulators will next week release information about the stress tests they are holding on 19 large banks. Expectations are that a substantial number will be forced to raise new capital and that some will be guided to converting existing preferred securities into plain old equity.