The center should transfer to the periphery their almost ill-gotten regulatory interest rate savings

Sir, Wolfgang Münchau in “The ECB must still do its bit to help solve the crisis” August 27, reminds us of that “There is a law against monetary financing of sovereign debt”. Should there not also be a law that prohibits doing so using the backdoor of banks and bank regulations? 

The fact that banks all over Europe could lend to Greece against only 1.6 percent in capital seems to me a very close relative of “monetary financing of sovereign debt”. These regulations, when something goes wrong, as it is almost doomed to go, because of the distortions these produce, create its own set of problems. 

When Münchau, with respect to any official explicit target for interest rate spread writes “The market would test any published target” we might therefore have to add, for precision, “market and regulators”, I explain: 

There are havens perceived as very safe, Germany, and those perceived as not so safe, Spain, and that would, without any regulatory intervention, reflect itself in the interest rates. But, the way current bank regulations are set up, with bank lending to the officially safe havens requiring much less capital than when lending to those “not-safe”, the natural market cleared interest rate differentials based on risk, become so much larger.

Anyone who is really sincere about solving the European problem, or even about not making it worse, must either eliminate the discriminatory effect of these regulations, or make sure that the safe-havens transfer some of their almost ill-gotten interest rate savings, to those less safe havens that have had to pay higher than natural free market rates.