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Share prices fall amid fears fatal weaknesses will be found in at least half a dozen institutions Financial markets are bracing themselves for a nervous weekend amid fears that today’s annual health check of Europe’s banks will find fatal weaknesses in at least half a dozen institutions, piling more pressure on the embattled single currency. Share prices fell and borrowing costs in vulnerable countries such as Italy and Spain rose as dealers awaited the results of the stress tests on 90 European banks, which will be announced once the markets have closed for business on Friday. Amid growing concern that Europe’s policy makers have allowed the debt crisis to spread to the major economies of monetary union, the announcement will provide details of the exposure of individual banks to debt writedowns or defaults. While the UK’s banks are expected to pass the stress tests, there are fears that the results could add to the market jitters rather than provide reassurance. The FTSE100 was down nearly 60 points in London on Thursday amid anxiety that the tests will show banks do not have enough capital to cope with bad debts. Although the tests have been toughened up since last year, they do not include the possibility of a Greek default, seen as increasingly likely by the markets. Italy had to pay record interest rates of 5.9% to persuade investors to buy its bonds, while borrowing costs for Spain also rose. Estimates of how many banks will need extra capital range from nearly a third of the 90 European banks, according to the ratings agency Moody’s, to nine banks needing €29bn, according to the average opinion in a poll of investors by Goldman Sachs last month. Six Spanish banks are expected to fail, although analysts polled by Reuters expect between five and 15 banks to fail. Marie Diron, senior economic adviser to the Ernst & Young eurozone forecast, said: “The stress tests are unlikely to bring much relief to the current tensions that plague the eurozone. They will probably show a small minority of banks failing, mainly in the eurozone periphery, with possibly a few banks in core eurozone countries failing too. But the credibility of the stress tests has been undermined by what is perceived to be too lenient assumptions.” The tests – discredited last year when Ireland’s banks collapsed four months after being given a clean bill of health by the regulators – are already causing controversy as the number of banks being tested was originally 91. However, the German bank Helaba pulled out on Wednesday in a dispute with the European Banking Authority, which is overseeing tests by domestic regulators. The UK’s banks, two of which have already been bailed out, are believed to have passed. The tests are conducted by national regulators across Europe but compiled by the European authority, which requires banks’ crucial core tier one capital to remain above 5% after worst-case scenarios, which include a drop in GDP over two years of 4%, compared with 3% for last year’s tests. Tamara Burnell of M&G Investments said: “In our view it is a bit like taking a driving test: you can pass the test and yet still be a terrible driver. The real test of whether anyone trusts you is whether people are prepared to get in the car with you. So whether or not banks pass the 5% core tier one stress test hurdle, the real test is whether investors and depositors trust them with their money over the long term, and there’s a long way to go before the European banks rebuild their reputation after a series of offences.” While an outright default by a European nation has not been included in the test – despite the fact that officials are now prepared for a Greek default – Christopher Wheeler, banks analyst at Mediobanca, notes that only about 20% of the government bonds held by banks are being stress tested because they sit in their trading books, rather than the banking books where bonds are held to maturity. Making assumptions about the “haircuts” – losses on government bonds across Europe – Mediobanca estimates that €81bn could be knocked off banks’ capital, 9% of the sector, in 2012. It is not just banks’ holdings of government bonds that are important, but also the way that governments have stepped in to support banks during the crisis, making the health of banks and their governments inextricably linked. Burnell said: “What we need to test is the ability of sovereigns to separate themselves from their banks.” Euro Stock markets Banking Currencies Europe Jill Treanor guardian.co.uk