Europe's banks are creaking under EU stress tests

Moody's downgrade of Spain's sovereign bond rating was expected, modest in nature, brought the agency into line with most of its rivals' assessments and contained a prediction that Madrid will not need to seek a bailout. Yet the action contributed to a wobble in markets and provoked another round of grumbling about how the credit rating agencies must be brought to heel. What's going on? The short answer is confusion – which in large measure can be pinned on EU authorities themselves. Even a week before the terms are unveiled, the next round of stress tests for European banks is struggling to achieve credibility. A 15% fall in stock markets, if that is really one assumption to be employed, doesn't sound remotely stressful. In such a climate, it is no wonder that estimates of the ultimate cost of recapitalising Spain's banks produce little agreement. Moody's says €40bn-€50bn (£34bn-£43bn), or €110bn-€120bn under extreme circumstances. The Bank of Spain says €17bn and the Spanish government sounds miffed that Moody's should dare to do its own sums. But the agency should. There is deep suspicion that Spanish provisioning rules, even after a tightening, allow lenders too much leeway to defer the pain of the fall in property prices over the past three years. Meanwhile, eurozone leaders hold two pow-wows this month at which to devise a safe way out of the eurozone debt crisis. In the market's view, step one is to show there is sufficient firepower to provide bailouts if necessary. But German chancellor Angela Merkel, on the back of election troubles, is unlikely to arrive in generous mood. For example, the idea of offering Greece and Ireland interest rates they can afford is still deemed too toxic to debate. All the while, the yield on Portugal's 10-year bonds drifts upwards, to an unsustainable 7.5%, not helped by prospect of a rate rise by the European Central Bank. A Portuguese bailout has looked inevitable for at least three months, and nothing has changed. It remains a reasonable bet that the summits will produce a workable fudge that will calm nerves for a while. But you can understand why investors have doubts: there is too much confusion and finger-pointing.