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Facing this adverse scenario, a private real-estate developer may approach the mayor of City X and request, say, 20 hectares of land to build a housing project.
While the probability of the negative outcome can be controlled by cross-holdings for the chosen level of bankruptcy costs and fire sales, the number of defaults in this adverse scenario is not mitigated.
This adverse scenario could be produced by growing concerns in the United States about financial stability risks, or higher-than-expected inflation.
1, 2 The authors of these studies concur that a complete resection of all visible disease (primary tumor and peritoneal implants), combined with hyperthermic intraperitoneal chemotherapy (HIPEC), offer a chance for long-term survival in this adverse scenario.
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"Overall, the stress test identified a capital shortfall across the four participating banks of €4.4bn under the baseline scenario and €14.4bn under the adverse scenario," the ECB said.
"I am encouraged that, because of good policies and the cooperation of central banks, it is currently the mild scenario and not the adverse scenario".
"In the adverse scenario of long negotiations and a default to the trade rules of the World Trade Organisation, GDP plunges by 5.5% by 2019," it said.
"The related exposure of financial firms could then be stress-tested under the adverse scenario of a late and sudden transition".
Banks' who fail the ECB's baseline test will have to raise fresh capital in the 'nearer term', while those who are only fail against the "adverse scenario" will have more time to strengthen their balance sheets.
In the adverse scenario used in the stress tests, the Spanish economy would shrink 4.1 percent in 2012 and 1.6 percent in 2013.
And house prices will be 21% lower in 2016 than envisaged in the baseline; that compares with a 15% deviation in the previous exercise.The most important change in the stress tests from 2011 is the treatment of sovereign bonds as financial markets turn sour in the adverse scenario.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com