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Bank stress test results loom -

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TICKY FULLERTON, PRESENTER: Joining us for our regular Friday night chat is economics correspondent
Stephen Long.

Well, Stephen, what everyone in the market is waiting for overnight tonight are the results of the
European bank stress test. What are we to expect?

STEPHEN LONG, ECONOMICS CORRESPONDENT: I don't think that we're going to see a 100 per cent pass
mark, Ticky. There's already reports from the Spanish press that some Spanish banks are going to
fail the stress test.

There's market expectations that at least one German bank and some Greek banks won't do well
either.

But, overwhelmingly, out of the 91 European banks that are being stress-tested by the regulators,
the expectation is that the vast majority will pass - for what's that worth, and I would venture to
say it's probably not worth all that much.

TICKY FULLERTON: What's the likely impact on financial markets, do you think?

STEPHEN LONG: It's very, very hard to say, because the problem we have here, Ticky, is that we
don't have a lot of knowledge about the methodology that they're using with the stress test.

There was a wonderful observation by one market analyst who says that perhaps never before has such
a major transparency effort been prepared and launched with such secrecy.

TICKY FULLERTON: And indeed, they might be a little bit light on; there's some worry that they
might be light on, these stress tests, to make the market more confident.

STEPHEN LONG: Oh, absolutely. Ticky, on what we do know, these are pretty weak stress tests.
They're testing against three scenarios: the first is the European Central Bank's current
projections of growth, a 3 per cent deviation from that, so a downturn, but not a catastrophic
downturn, and then looking at exposures to sovereign debt.

Now that's the pointy end of it. But they're pretty mild stress tests. The current vogue is to test
financial institutions to destruction.

So these are mild stress tests, clearly designed to ensure that most banks pass the test. And we
really want to know a little bit more detail, and that's what the markets are looking for: a bit
more detail about the methodology being used.

TICKY FULLERTON: So if the banks aren't cope - say the stress tests are very mild, but actually it
turns out that the banks can't cope with their sovereign debt exposure, what's the rescue strategy
there?

STEPHEN LONG: Well, the rescue strategy I suppose is that the sovereign is meant to rescue them,
but if it's the country's own debt then you got a problem. Then I guess they turn to the 700
billion euro - what do they call it? The stability facility - wonderful rhyming ...

TICKY FULLERTON: Sounds very 'Get Smart'!

STEPHEN LONG: That's being set up there. But, push come to shove, you've got a situation where, on
everything we know, the banks have got a lot of exposure and hidden and undeclared losses; in the
private sector they've got exposure to sovereign debt and we will find out more about that from
these stress tests.

And you've got - you've also got a whole lotta countries that don't have enough money. Where's all
the money gonna come from?

TICKY FULLERTON: And briefly, RBA chief Glenn Stevens even made an interesting comment about
central banks, didn't he?

STEPHEN LONG: He certainly did. He observed that banks were stepping into the private marketplace
with a risk that it would atrophy, but in doing so and with all the efforts they've done to bail
out banks, they are exposing themselves and their governments to genuine risk. I thought that that
was a very interesting observation.

TICKY FULLERTON: Stephen Long, thank you very much for joining us.

STEPHEN LONG: You're welcome.