June 28, 2015

Greece’s odious debts resulted from odious credits… those that too many want to keep flowing

Sir, I refer to Anne-Sylvaine Chassany’s FT-Lunch with Thomas Piketty, “Europe is choosing the wrong path” June 27. In it, Piketty argues for the cancellation of much Greek debt.

Anyone thinking that Greece’s debt is not already de-facto canceled, by virtue of it being impossible to serve, is either cuckoo, in desperate need of some blissful ignorance, or wants to, instead of honest haircuts, use non-transparent means like inflation to settle it. And so of course the Eurozone’ air would be much clear by biting the bullet. But two comments needs to be made:

First that that should have to go hand in hand with analyzing why Greece got into troubles, in order to avoid a repeat… and that seems to be of no concern to most, including Thomas Piketty.

The over indebtedness of Greece resulted from odious credits that would not have been extended, were it not for regulatory incentives; namely the fact that banks were allowed to leverage immensely their equity when lending to the government of Greece as compared with what they could leverage lending to for instance European SMEs.

The problem though is that, may we say naturally, because of conflicts of interest, too many in Europe, like government employees and/or statist ideologues, are too interested in keeping the flow of these easy credits going. In other words, too many have found redistribution and cleaning up debris after the storm to be a politically more rewarding activity than producing or building more storm resistant houses… and this guarantees the continuance of Europe’s “deeply flawed governance”.

Secondly, allowing banks to hold less equity against the borrowings of “the safe”, than against the borrowing of “the risky”, signifies a subsidy to those who already have more and cheaper access to credit, and a regulatory tax on those who already have less and more expensive access to bank credit. And this translates into an odious and dangerous distortion of the allocation of bank credit to real economy, and which also, by negating opportunities to those most in need of it, is an important driver of inequality. Not wanting to understand this could be explained in terms of intellectual and moral procrastination… and in Europe, I am sad to say to many seem to be engaged in that.