Sunday, August 15, 2010

What lies ahead for Europeans as they return from summer holiday?

Several weeks ago, European banks published results of a banking system stress test. With only seven banks failing out of ninety-one tested, European central bankers celebrated its success. Last week, Germany reported strong GDP growth (2.2% from last quarter), France’s report was more moderate (0.6% growth from last quarter) while other countries reported weaker results.

MY TAKE: Recently Greek, Italian and Portuguese banks increased their borrowings from the ECB, a signal that the challenges facing the European banking system have not been resolved. Additionally, similar to the United States, the Eurozone is moving into the "post-stimulus" stage of its economic cycle. The true “stress test” for Eurozone members will be the level of resilience these economies can maintain in an environment of weak growth and decreased risk tolerance. To gauge the level of recovery or weakness in the Eurozone, it will be important to monitor borrowing trends from the ECB along with the performance of credit markets; which have been sending a cautionary message in recent days.

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