Business World

Tuesday 23 January 2018

Stress tests forecast falls of 22.7pc in bonds

Laura Noonan

Laura Noonan

THE next round of European stress tests incorporates falls of up to 22.7pc in Irish government bonds, marking our sovereign out as the fourth-riskiest debt provider in Europe.

Details of the 'shocks' in the European tests, many of which will also be included in the more imminent Irish stress tests, were revealed yesterday to clamouring criticism from analysts who deemed the tests too lax.

Meanwhile, Anglo Irish Bank chairman Alan Dukes yesterday said the worst-case property scenarios Irish banks were being tested against looked "too rosy", a view echoed by property giant Savills.

Bloxhams' chief economist Alan McQuaid said all the details that had emerged about the stress tests led him to believe Ireland's banks could need an injection of more than the €35bn allowed for in the bailout.

The comments came after the Central Bank published the economic parameters for the Irish stress tests on Wednesday, and the European Banking Authority (EBA) published extensive details of its tests yesterday.


The Central Bank yesterday confirmed the non-economic elements of the stress tests would be "broadly in line" with much of the detail published by the EBA yesterday.

The detail of the EBA tests includes losses of 22.7pc on Irish 15-year bonds, better than the 30.6pc losses on Portugal's 15-year debt but worse than most other European countries.

The EBA is also testing banks' ability to withstand a 15pc fall in European stock markets and a 75 basis points -- or 0.75pc -- rise in eurozone interest rates.

Last summer's stress tests were broadly discredited for massively underestimating the strain on Europe's banking system, particularly since institutions like AIB passed the test and needed multi-billion euro injections within months.

The EBA has vowed to make this year's version more robust, but analysts at Citi yesterday said they remained "sceptical of the ability of these new bank stress tests to reinstate market confidence".

The sentiments were echoed by analysts at Credit Sights who said "anyone looking for a worst-case scenario rather than a moderate stress test will be disappointed".

The Irish version of the stress tests are also coming under criticism for being too lax, with experts hitting out at the worst-case assumptions that commercial property prices will fall by a maximum of 70pc from the peak and house prices by a maximum of 60pc. Mr McQuaid said the picture emerging of the stress tests meant the banks "will swallow up the entire €35bn earmarked for it".

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