How sovereign debt will affect the ECB stress tests

The economic crisis showed that sovereign debt is not free from risk. Nobody knows how the European Banking Authority (EBA) and the European Central Bank (ECB) are going to factor in sovereign debt when they run their next stress tests on European banks.

The banks are worried about the issue, because they have been carrying the weight of sovereign debt for the past several years. Spanish banks are no exception, although the decline in interest rates and the risk premium favor the nation. In 2012 banks held 2.49 billion euros in sovereign debt, but in 2013 the situation switched directions and the banks held only 1.96 billion euros. It is not clear whether this financial cushion will be a factor in the stress tests, but there is no doubt that the banks are in a better spot now than ever since the crisis began.