Whatever happened to European sovereign risk? Yields on the government bonds of the weakest eurozone members have been gingerly tightening in the past few days. This is particularly true of Spain, which seems to be enjoying a mini re-rating: bond spreads along the curve have fallen by up to 100 basis points this month. The sovereign, along with Portugal, saw refinancing costs fall this week – not substantially, but every basis point helps. The better tone in the markets is being attributed to a relief rally after the European banking sector was given a mostly clean bill of health by last week’s stress tests, which have made banks’ balance sheets a little more transparent. But just because you have a new pair of spectacles doesn’t mean the film you’re watching is any better.

Take Greece. The country’s 10-year bonds yield about 745 basis points over German equivalents, about 220 basis points less than at the height of the crisis. To be sure, five out of six Greek banks passed the stress test with varying degrees of distinction. The government has made progress in tightening fiscal policy, including reform of public sector pay and pensions. In general, the system was so inefficient that the mere enforcement of existing rules was always likely to yield higher tax revenues. Indeed, the government claims to be ahead of the targets it agreed to in the spring in return for its €110bn rescue.

That is great, but the reality is that Greece is still heading for a debt-to-GDP ratio of nearly 150 per cent by 2013 and its economy is not growing. Spain, Portugal and Ireland will see minimal growth this year and next, even though they’ll have significantly lower debt levels. Spanish bonds are no longer pricing in the possibility that Spain will become the next Greece, but Greek bonds are still pricing in a debt rescheduling. This scenario was the elephant in the room that the stress tests conveniently ignored. European sovereign risk hasn’t gone away. It’s just on its summer holidays.