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A fresh report shows that many big European banks were very “creative” when it came to estimating the size of the sovereign debt that they held. This already sent the Euro way down. Will this turn into an avalanche? Is the debt crisis returning through the front door?

At the beginning of May, the financial world was rocked by sovereign debt issues in Europe. IT turned from a “Greek tragedy” into an all-European problem, as much bigger countries such as Spain were seen struggling to pay their debt and to finance old loans.

The EU pledged 750 billion Euros as a safety net, and after the markets calmed down, major European banks were tested in “stress tests” to see how they will survive problematic debt. The results were outstanding, with only 7 banks out of 91 failing the tests – all small ones. The amount of problematic debt was quite low.

Already then, there were doubts about the methods of these stress tests. It’s now clear that the tests were very very problematic. The WSJ reports that many banks were very creative with reporting their exposure to sovereign debt by Spain, Greece and Portugal. For example:

BIS data from March 31 indicates that French banks were holding about €20 billion of Greek sovereign debt and €35 billion of Spanish sovereign debt. In the stress tests, four French banks, which represent nearly 80% of the assets in France’s banking system, reported holding a total of €11.6 billion of Greek government debt and €6.6 billion of Spanish debt.

This is bad news for the Euro, that enjoyed a quiet summer on the European front and a problematic one in the US. EUR/USD enjoyed American problems. Is this changing?

EUR/USD falls

This report sent the Euro down. During the usually quiet Asian session, as American traders are still enjoying the end of Labor Day weekend, EUR/USD collapsed from 1.2880 to 1.2780, and the fall continues.

The next minor line of support is at 1.2770, followed by a more significant support line at 1.2722. Lower, 1.2665 is a minor line and 1.2610 is stronghold. A recovery will send the pair towards 1.2840, followed by 1.2930.

The debt issues were never fully solved. They were shelved. Germany, France and a handful of stronger European countries continued growing, while Spain, Portugal and Greece suffered from fresh austerity measures.

But the German and French banks are still very vulnerable to sovereign debt. A default from one of these countries can create a domino effect that can send also the stronger countries down.

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