We are big fans of French finance minister Christine Lagarde — she sounds like a genuine mother superior, someone who really knows how to get things done. Or, failing that, to sound like she does. You can bet that, this time around, the stress test of PIGS banks is going to be substantive, and that there won’t be any loose talk about “harmonization.”

Before the related issue of restructuring the mountain of bad debts at European banks can be addressed, Ms. Lagarde said, European countries need to conduct meaningful tests on the health of their lenders’ balance sheets. Such stress tests have been carried out twice during the current crisis but failed to win investor confidence. Since the last round, published in July 2010, further problems have emerged, notably at Spanish and Irish lenders. The results of the latest tests are expected to be published in June.

“We will test banks in a very comprehensive manner and a more credible fashion than we did last summer,” she said. “We need to improve the overall credibility of the process, and that includes communication, range, scope, a combination of bottom up, top down quality control.”

She argued that in France, at least, there is no sense that taxpayers are losing out as government bail out their banks without asking bondholders to take write-offs, known as haircuts. Paris set up facilities to help its banks in 2008 and 2009, but it was not on the scale of the assistance required in countries like Ireland and Britain. “My taxpayers are quite happy because they have collected fees — or, rather, interest rates — and they haven’t paid anything.” she said, adding that investors in many euro-zone countries had already been losing money without a coordinated restructuring.“Ask the Anglo Irish shareholders if they’ve taken a hit or not,” she said, referring to the debt-laden Irish lender, which has proved an Achilles’ heel for the economy of that country.

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This entry was posted on Tuesday, January 25th, 2011 at 10:30 am.