4 Portuguese banks survive stress tests

Four Portuguese banks -- Espirito Santo, BCP, CGD and BPI -- all passed the stress tests conducted by the European Banking Authority (EBA) on Friday. The result, coming 10 days after Moody's ratings agency downgraded the country's rate by four levels to junk, is a relief for the Portuguese economy. Portugal, holding 85 billion euros (119 billion U.S. dollars) in loans from the International Monetary Fund, the European Central Bank and the European Commission, is currently in a bailout. The stress tests foresaw an economic recession, a bear market at the stock exchange, a worsening debt risk as well as the consequences of the economic shock originating in the United States. Using a static balance sheet of December 2010, the tests considered a Core Tier 1 of 5 percent covering a two-year scenario which was more demanding than last year, ignoring the positive effects on the yield an interest height could create. Although all the four Portuguese banks passed the tests, two of them, BCP and Espirito Santo, were advised to reinforce their balance sheets. The stress tests, first applied in the United States as a consequence of the financial crisis, aim at analyzing how robust a bank is in certain crashes. After the Greek debt crisis, the EBA decided to apply the tests to European banks to find out where the weak links in Europe's financial system are.