15
Jul

By Landon Thomas Jr. and Jack Ewing 

Some banks will fail the stress tests and some barely pass, said Michel Barnier, European Union commissioner for internal markets.

Plummeting bank stocks. Spreading contagion. Policy makers dazed and confused. 

Europe’s festering debt crisis may well be approaching its own post-Lehman Brothers moment, when fear of the unthinkable finally prompted British and American governments to take radical action and force most of their capital-thin banks to accept government money — whether they liked it or not. 

But to the frustration of many, Europe seems far removed from such a drastic move. 

Instead, the euro zone’s top banking supervisor will announce on Friday the results of its latest examination into the health of its financial institutions. It is an exercise that an increasingly desperate European Union hopes will quell investor fears that the region’s banks have become too impaired by holdings that may be seriously overvalued to provide the loans needed to stimulate economic growth. 

While European finance ministers pledged this week that they would have a backstop plan for vulnerable banks, in practice that task will be left to national banking regulators, who have varying levels of resources and political will. 

The banks’ stress test results come at a time of cresting market anxiety, spurred in particular by worries of a strike by domestic buyers for Italian government bonds. On Thursday, the yields on two-year Italian bonds — an accurate gauge of short-term market sentiment — were at 4 percent, higher than Spain’s and double what they were a year ago. (For Greece, two-year money is available at a rate around 30 percent.) 

And the overnight Euribor rate — what banks in Europe charge each other for short-term loans — more than doubled over the last week, to 1.47 percent from 0.6 percent, as banks within the euro zone have become more reluctant to lend to each other. 

That is still well below the high of around 4 percent reached after the Lehman collapse. But bankers say the increased jitters in Italy are leading investment banks to demand higher amounts of collateral and cash to back up their loans to Italian counterparties. Read more… 

Landon Thomas Jr. is a financial correspondent for The New York Times based in London. His areas of coverage include the Middle East, Europe and the City of London. Jack Ewing is Frankfurt bureau chief for BusinessWeek. 

 As published in www.nytimes.com on July 14, 2011 (a version of this article appeared in print on July 15, 2011, on page B1 of the New York edition with the headline: Europe Looks for Hope in Bank Test Results).

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