The eurozone output data and stress tests do not bear examination.

We have some some rises in European stock values today thus far, and a little stagger upwards by the euro itself. This is based largely on some ‘good’ economic output figures for the eurozone, and the expectation by a few mugs that the Eurobank stress test will serve to calm fears around the globe.

This brief article will highlight the bollocks upon which this is based.

First, the ‘encouraging’ figures in the EU economy. The WSJ notes that ‘The euro zone’s private sector expanded at a faster pace in July, boosted by an unexpected pickup in both the manufacturing and the services sectors’.

Simply not true. French manufacturing went backwards, and most of the more troubled members were not surveyed. There is just ONE nation in the EU showing both service and manufacturing rises – Germany. There, they have not only growth but acceleration of growth. To paraphrase The Producers, this is ‘Springtime for Germany, winter for Portugal and Spain’. The so-called ‘inequality’ factor just got worse – the last thing the region needs.

The safest way with data is always to ignore half-educated hacks and lazy newswires, going instead to the horse’s mouth. And this is what Markit the Horse says about German exports:

However, new export business rose at the weakest rate since January, in part reflective of fragile demand from key Euro area trading partners’

If this is good news, then I’m a Dutch banana. It is in fact more of the same: Germany steaming ahead at Full Ahead Both, and everyone else at All Stop. (With all the usual doubts I have about French ‘service sector’ data: if all of that is private, then all I can say is, it’s a liberally eclectic definition of private.)

Second, the ‘robust’ stress test being conducted on eurobanks.

“The recent evolutions on the markets show we are in the process of winning back the confidence that we lost,”
said German Finance minister Wolfgang Schauble yesterday. I like Schauble: he’s a good bloke with lots of sense and not much time for Jean-Claude Trichet. But he has a job to do, and so this is the sort of thing he’s going to say. In reality, both the facts and market sentiment are against him.

The number of institutions in the test number 91. This represents perhaps a third of all relevant banks in the currency zone. As I write, fully 170 banks cannot get at wholesale markets because interbank trust is shot to pieces. <!– /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-GB;} @page Section1 {size:8.5in 11.0in; margin:1.0in 1.25in 1.0in 1.25in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.Section1 {pThe sample size remains woefully inadequate – and the same thing applies to the methodology: banks will be allowed to use their own internally derived models for valuing certain securities, and some banks are – I’m not joking – testing themselves and simply writing brief reports saying ‘AOK’ and so forth.

As Mike Whitney, the senior writer at Global Research, observes:

The tests are a joke. The banks will continue to use accounting-rule changes and other gimmickry to obfuscate their losses. Trichet will use the tests to step up his bond purchasing program (QE) which will transfer the banks losses onto the member states. Many of the banks are insolvent and need restructuring. But they are in no real danger, because they still have a stranglehold on the process.

We have seen before how, time and again, stress tests seem to be about letting banks recover at everyone else’s expense – by presenting to the totality of crisis as one about sovereign debt. In fact, the indebtedness of Franco-German banks (who lent to the ClubMed spendaholics) is what’s really at stake here. And Trichet of the ECB has this as his first and last objective.

Market sentiment could not be more cynical at the moment. Not only The Slog’s own panel of trusted traders, but also the ones being interviewed worldwide by mainstream media confirm this reality. Tom Lauricella’s piece in the WSJ yesterday makes the point succinctly:

‘Many say the euro has been more a reflection of concerns about the U.S. economy than optimism about Europe’s. ….the much ballyhooed stress testing of banks, results of which are due Friday, may already be priced into the market. ‘

This is right on the money.

Earlier related post: IMF expresses doubts about eurobank stress tests.