This is the icebreaker Alexis Tsipras should use with Angela Merkel

Sir, Wolfgang Münchau refers to the new discussions between Greece in Germany and that are to be held in a climate that could not be characterized as friendlier. “A stealthy route to Grexit”, July 7.

As I have argued many times, if I was Alexis Tsipras, as a potent icebreaker, I would tell Angela Merkel: 

“Please don’t just blame Greece. The Basel Committee, between June 2004 and November 2009, allowed banks to leverage their equity and the explicit and implicit support they received from taxpayers 62.5 times when lending to Greece.

That gave European banks irresistible incentives to give Greece loans that by nature are irresistible to most politicians and government bureaucrats.

Had it not been for that dear Angela… we would be sitting here discussing much more pleasant affairs.” 

@PerKurowski

FT Greece’s tragedy was more the result of malfunctioning bank regulations than a malfunctioning Euro.

Sir, Gideon Rachman writes: “both Greece and the rest of the eurozone should treat the Greek vote as an opportunity to rethink the malfunctioning euro project” “Europe should welcome Greece’s vote” July 7.

“Malfunctioning euro project?” Between June 2004 when Basel II was approved, and until end of November 2009 when Greece got down-rated to the BBB area, banks needed to hold only 1.6 percent in capital when lending to the government of Greece (8% standard requirement x 20% risk weight). That meant that banks could leverage their equity, and the explicit and implicit support they received from taxpayers 62.5 times to 1.

With regulators in the Basel Committee capable of creating idiotic regulations like that, the Greek tragedy just had to happen.

Where was the IMF when its opinion on this was sorely needed? I refuse to believe all professionals of the IMF think that the credit-risk-weighted capital requirements for banks do not dangerously distort the allocation of credit.

Not even the sturdiest Euro project can survive such kind of foolishness.

The best way to reduce the current animosity between Greece and for instance Germany is to tell it as it really was. The banks were given irresistible incentives to give Greece loans that by nature are irresistible to most politicians and government bureaucrats. Correct for that, punish the regulators, and then Greece (and Europe) has a chance to regain its footing.

Austerity is when you have resources and decide not to spend it. Spending financed with bank loans or other taxpayers’ money is not really the lack of austerity, it sounds much more like profligacy.

PS. And please do not tell me that this is only because I have a blind faith in the Euro.

@PerKurowski

Less trust in the Greek government has a great silver lining we can only hope lasts long enough.

Sir, Peter Spiegel writes: “Trust is so broken several eurozone officials say even if Greeks defy Mr Tsipras and vote Yes tomorrow, they may be unwilling to deal with his government to negotiate a new bailout.” “Trust evaporates after bewildering week” July 4.

Between June 2004 and November 2009, with Basel II, the regulators in the Basel Committee allowed banks to lend to the Government of Greece against only 1.6 percent in capital, which implies an authorized leverage of over 60 to 1 when lending to Greece… and if that is not an outrageously excessive trust what is?

And since banks were required to hold more capital when lending to the Greek private sector that also implied regulators believed Greek government bureaucrats could use bank credit more efficiently than the private sector… and if that is not complete lunacy what is?

The excessive trusting of Greek governments caused the current tragedy… and so less trust in its government cannot really be too bad. Let us hope that distrust lasts long enough for the Greek citizens to have a chance to rebuild their own country.

That said, the citizens of all other countries must also beware when Basel Committee brings gifts to their own government bureaucrats.

In not knowing what he is doing, Greece’s Alexis Tsipras has a lot of company, among which is the Basel Committee.

Henry Foy and Kevin Hope write that a Greek MP said of Alexis Tsipras: “He is charming, good-looking and has a sound grasp of powerful messages, but he has no idea what he is doing.” “Enigmatic leader cuts divisive figure as country faces jeopardy” July 4.

I completely agree but in order to put that sad fact in its correct perspective let me also say that regulators who between June 2004 and November 2009 allowed banks to lend to the Government of Greece against only 1.6 percent in capital, which implies an authorized leverage of over 60 to 1 when lending to Greece… also had no idea of what they were doing.

And so banks offered to give the Greek government a lot of credit... and what Greek government could have said no to such gifts?

Greek citizens, beware of Basel Committee’s bank regulators bringing gifts to your government!

@PerKurowski

Poor Greece is squeezed between a bad regulators’ rock and a leftist-ideological-blocking hard place.

Sir, Mark Mazover writes about “A last chance for Tsipras to choose country over party” June 25.

In it the Professor refers to “the country’s sky-high unemployment rates” and to “Greek banks on life support”.

That would call for two things:

First the elimination of the credit risk weighted capital requirements for banks which effectively blocks the fair access to bank credit of those perceived as “risky”, like the SMEs who could most help to generate sustainable jobs.

Second, something like Chile’s capitalization of its banks during the 1982-83 crisis, by purchasing their non-performing loans, in the understanding that these loans would be re-purchased by the banks before their dividend payments could resume.

But to get bank regulators, like the former Chair of the Financial Stability Board, Mario Draghi, to admit how wrong they have been is no easy task.

And to get Tsipras and Syriza, to back a plan executed during the Pinochet regime, that is no easy task either.

In my opinion, without doing both those things the chances of Greece recovering in a foreseeable time are nil. But, for Greece to get out of this trap between a rock and a hard place, would require some real strong leadership, from Greece and from Europe.

@PerKurowski

The hard left in Greece should shut up. Unless absolute fools, it was communist bank regulators who took Greece down.

Sir, Gideon Rachman, as one of the possible games Greeks are playing writes: “Syriza is a coalition party and the hard left of the party is likely to split off if Mr Tsipras is seen to accept austerity in return for a new agreement with Greece’s creditors”, “Four games the Greeks may be playing” June 16.

Bank regulators have decided that banks need to hold absolute minimum capital when lending to governments (or sovereigns as these like to be called) when compared to what they are required to hold when lending to for instance SMEs. With that they allow banks to earn much higher risk adjusted returns on equity when lending to governments than when lending to the other deemed risky.

And with that regulators set up the trap that guaranteed that governments would, sooner or later, become over-indebted… and one of the first one to fall hard in that trap was Greece.

Since those capital requirements also imply that regulators believe that government bureaucrats can use bank credit more efficiently than for instance the SMEs, this has to mean that the regulators are either absolutely foolish statist technocrats… or hardline communists.

And so, if I was Mr Tsipras, I would be very careful about furthering relations with the hard left… who knows what other tragedies might come out of it.

Sir, whether current bank regulators are fools or communists, Greece, and the Western World at large, need to get rid of them... urgently.

@PerKurowski