June 08, 2016

Make sure Greek banks can lend to the risky private sector, in reasonable amounts, against low capital requirements

Sir, Martin Wolf, from his perspective, “the latest debt sustainability analysis from the International Monetary Fund [that shows] the programme agreed in 2010 was wildly unrealistic”, correctly discusses Greece’s future in “Painful choices still hang over Greece” June 8.

Big public debt haircuts, whether transparent or disguised, are needed in Greece. But that won’t suffice. I look at Greece from a complete different angle.

First I am convinced that what did Greece in, was the absurdity of allowing banks to lend to it against very little, even zero, capital. That produced expected risk adjusted returns on equity that were just impossible for banks to resist; that produced offers of credit that were just impossible for Greek governments to resist, and the crisis ensued. And this mistake needs to be admitted by the IMF and by the Eurozone governments.

And second, the risk-weighted capital requirements for banks discriminate against the access to bank credit of those perceived as risky, like SMEs and entrepreneurs; and that makes it impossible for the real economy in Greece to reach the dynamism needed to pull it out of its misery.

Anyone thinking that a recovery commandeered by the Greek government or just those who are perceived as safe from a credit point of view is possible, is simply cuckoo.

And so first things first, what is required is to make sure capital scarce Greek banks can lend to the “risky” private sector, in reasonable amounts of course, but against quite low capital requirements.

@PerKurowski ©