July 27, 2015

The best Sovereign Debt Restructuring Mechanism (SDRM) is the one that most reduces the need for it.

Sir I refer to your discussions about a “holy grail… a sovereign debt restructuring mechanism (SDRM) — a bankruptcy procedure for states.” “To err is human, to forgive is statesmanlike”. July 27

Even though I agree with the need for a SDRM, we citizens need to be very alert to how it is designed. Bank regulation’s bureaucrats/technocrats, behind our backs, have already given public borrowings an enormous unearned/undue advantage, by allowing banks to hold much less capital against public debt than what they are required to hold against private sector debt. 

If on top of that we now also make it easier for government bureaucrats/technocrats, hiding behind the mantle of “sovereignty”, to get out of the debt they contracted, then we have really messed things up for ourselves.

In this respect I believe any acceptable SDRM should begin with:

First and foremost by eliminating all incentives that can help governments contract too much debt.

And then by defining clearly what, when compared to ordinary credit to the public sector, should be  deemed as odious credit. For instance, credit not awarded in a transparent way, or awarded when it was clear that the resulting debt might not be sustainable, and was therefore of speculative nature, should not receive the same treatment in a SDRM, as public credit awarded transparently and when there was no doubt about the sovereigns capacity to serve it.

Let us be very clear about that the best SDRM is the one that reduces the need for it.

And of course it is human to err… but that does not mean that bank regulators should not admit their mistakes and be held accountable for it. Pseudo-statesmen forgiving behind curtains their own mistakes... really?

How can you ask creditors, or taxpayers, to take a hit on Greece, while pardoning, even promoting, bank regulators?