April 21, 2015

Greece and Europe, allow your banks to function like banks again…look how Chile did it.

Martin Wolf writes: “It is Greece’s fault. Nobody was forced to lend to Greece.”, “Mythology that blocks progress in Greece” April 22.

Perhaps not forced. But setting up irresistible temptations, like allowing banks to leverage their equity, and the support they receive from society, more than 60 to 1 when lending to Greece, comes extremely close to forcing. Put a plate with a good chocolate cake in front of children, and see what happens.

And then Wolf writes: “The ECB should not lend to clearly insolvent banks”… And I ask, why not? To have ECB competing with pension funds and widows and orphans for whatever little “safe” assets there is left does not make any sense.

Now if the ECB did like Chile did in 1982-83; capitalizing all banks by purchasing their non-performing loans; against an agreement that banks would not pay dividends until they had repurchased these loans from the ECB, then Greek banks would be fit to operate again as banks.

Of course, for the Greek banks to be helpful to the real Greek economy. you would have to get rid of the credit risk weighted equity requirements for banks, those which impede that banks will give credit to those who most could do good by receiving bank credit, like to the SMEs and entrepreneurs.

Whatever, to solve Greece’s problems, more zero risk weighted loans to the sovereign, in order for government bureaucrats to allocate the resources derived from bank credit, will just not cut it… no matter how much haircut on Greece’s debt you accept.

And “the Centre for Economic Policy Research notes that excessive debt hangs over the entire eurozone, not just Greece.”

Yes indeed, and that is why I would suggest applying the Chilean solution all over Europe.

Europe, allow your banks to finance the riskier future, and keep them from only refinancing the safer past.

PS. This was written before I discovered that, in the case of Europe the regulations were even worse than Basel II's. The European Commission adopted Sovereign Debt Privileges which assigned a 0% risk weight to all their sovereigns. That meant banks could lend to Greece without holding any capital at all. Holy moly! To top it up Eurozone sovereigns are indebted in a currency that de facto is not a real domestic (printable) currency for them.