The stress tests for European banks will not include a haircut on German sovereign bonds, two banking sources in Germany told Reuters on Wednesday.

Bunds will not be stressed, one of the sources said, adding that French sovereign bonds if at all, will be stressed to a very limited extent.

Sovereign bonds of the troubled PIIGS states -- Portugal, Italy, Ireland, Greece and Spain -- will however see significant stress tests, the sources said.

For some PIIGS states there will be a double-digit haircut, one of the two sources said, adding this would not be as drastic as expected by some financial analysts.

The scenario used in the stress test on banks' ability to withstand an economic downturn will assume different rates of decline in gross domestic product (GDP) in 2010 and 2011 for different countries, the sources said.

For Germany, for example, the test will assume 2010 GDP growth of 0.2 percent and a small decline in 2011, the sources said.

European Union bank regulators were expected to reveal on Wednesday how tough their health checks of the region's banks will be, in hopes of restoring confidence to markets worried about ballooning public debt.

The Committee of European Bank Supervisors (CEBS) will outline its methodology for a stress test that simulates the impact of a severe economic shock on about 100 banks in the euro zone and other countries, other sources close to the process told Reuters earlier on Wednesday.

Markets are so far unconvinced the stress tests, whose results are due to be published on July 23, will be credible.

The CEBS was not available for comment.

In a sign of political influence, those sources said there was last-minute haggling among EU states over whether to publish a full list of banks being tested because it was still not finally decided which German banks would take part.

The test is expected to cover banks in the 16-nation euro currency area as well as Britain, Sweden and Denmark.

The European Central Bank (ECB) and the European Commission, the EU's executive body, are pushing governments to take a leap of faith, arguing the test will not convince investors if it is too easy.

(Additional reporting by Huw Jones)

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