The diabolical mother of all quid-pro-quos goes back to 1988, to Basel I.

Sir, in “Europe heads back into the storm” November 18, you refer to “a diabolical bargain that has core states lend to peripheral ones so that they can support their banks, all to save financial institutions in the core from losses” but you do not mention the fact that the governments are just keeping up their end of that mother of all quid-pro-quos bargains between states and banks.

When the Basel Committee in 1988, in Basel I, set up capital requirements for banks that were dramatically lower when lending to governments, compared to when lending to their ordinary private clients that was when this Faustian bargain originated. When the Basel Committee accepted, on behalf of the governments, it must have been knowingly, that the credit rating agencies would when rating the banks also include the willingness of the government to support the banks, then the diabolical vicious circle was sublimely completed.

Of course when you say “this game of bail-out on the sly cannot be sustained for much longer” you are absolutely correct, but neither can a bank-regulation on the sly that permit UK banks to lend to the triple-A rated governments, like the UK, against zero capital, be sustained much longer. Why does FT, without fear, call out the first, but then not act without favour, calling out the second?