German confidence slumps again, spoiling post-stress test mood by Geoffrey Smith @FortuneMagazine October 27, 2014, 7:21 AM EDT E-mail Tweet Facebook Google Plus Linkedin Share icons Another fall in German business confidence poured cold water on Europe’s financial markets Monday, dousing hopes for a relief rally after the continent’s biggest banks emerged unscathed from the European Central Bank’s stress test. The closely-watched Ifo business climate index fell to 103.2 in October from 104.7 in the previous month, its lowest level since the start of 2013. Both the assessment of current conditions and of expectations for the future were markedly lower, as the Eurozone’s largest economy continued to struggle with issues ranging from a sharp drop in exports to Russia to the Eurozone’s stagnation and increasing pressure on Germany to do more to revive it. Ifo said the climate in manufacturing “deteriorated significantly”, and said its manufacturing index is now only marginally above its long-term average. However, the service and construction sectors, which are less sensitive to the export outlook, both held up comparatively well. The news was enough to turn Europe’s stock markets around after a bright start helped by the news that none of the region’s most important banks failed the ECB’s stress test, and by a victory in Ukraine’s parliamentary elections for moderate, pro-European parties. Markets had reacted enthusiastically to the ECB’s assessment that only 13 (relatively small) banks still don’t have enough capital to withstand a sharp downturn in the Eurozone economy. Shares in some of the banks that people expected to fare worse, such as Germany’s Commerzbank AG or Spain’s Bankia SA, rose sharply in reaction to the news, before the whole market was hit by the news from Ifo. The ECB’s stress test was the latest in string of efforts by European authorities to restore confidence in a banking sector which often hasn’t looked fit for purpose since the crisis. JP Morgan analyst Kian Abouhussein in London said the exercise was “credible, detailed and implies limited capital raising” for the most significant banks. That’s a sharp contrast to the reception given to earlier efforts, which were hobbled by political reluctance to admit to the scale of the problems in the sector, and which were discredited by some high-profile failures among the banks that passed. But if the stress test gave a largely clean bill of health to individual banks, the scale of the task for the sector as a whole was underlined again Monday when the ECB released its latest figures showing that lending to the private sector fell 1.2% in the year to September. Although that’s an improvement from a contraction of over 2% as recently as May, loans to businesses have been falling without interruption for over two years, partly because of the inability of weak banks to lend, and partly because of a shortage of credit-worthy borrowers.