Bank regulators and central bankers owe Greece and Germany some explanations and apologies.

Sir, I refer to Gillian Tett recounting what happened in a meeting of central bankers last year in Switzerland, “Why Europe owes a debt to history” January 17.

It says: “To many Germans and other northern Europeans present, it seemed outrageous – if not immoral – for anyone to suggest that Greece’s debts be written off… ‘How can you forgive debt when a country has an official retirement age of 50?’ an official said”.

That is absolutely the wrong question, the right being: “How on earth could you lend so much to a country that has an official retirement age of 50?”

By means of allowing banks to lend to sovereigns holding much less equity than when lending to citizens, the whole Basel Accord… I, II and III, have been inducing banks to lend too much to “infallible” sovereigns.

Basel II of June 2004 explicitly stated that, if a bank lent to a sovereign rated as Greece was at that time, it needed to hold only 1.6 percent in equity against such loans; meaning that it could leverage its equity more than 60 to 1; meaning that if it thought it could make just half of a percent margin onthose loan, it would be able to obtain more than 30 percent return on equity a year. 

I have heard that reality was even worse than Basel II, as seemingly European banks were allowed to lend to Greece, and the other European sovereigns, against zero capital… meaning infinite leverage… meaning infinite expected returns on equity.

Clearly without such regulatory lunacy Greece, and other sovereigns, would never ever have been able to rack up so much debt. Therefore it is bank regulators and central bankers who owe Greece and Germany some serious explanations and, foremost, many truly sincere apologies… to say the least.

Let us hear those mandarins telling Europe “Forgive us, we had no idea of what we were doing”... and then let’s see if Europe forgives them... their sin of hubris.

The other side of odious debt is odious credit.

Do financial regulators have a legal right to discriminate?

Sir, Benjamin Friedman writes that the activity of so many of our young well educated luminaries working in finance “adds no economic value” “Overmighty finance levies a tithe on growth”, August 27. My first question is how does he really know it is because they are well educated and not because they work in a quasi-monopolistic environment? My second, if so are we not to blame professors for it? And third, should the world sue Harvard and other for their teachings?

Of course Friedman has a point but what really levies a financial tithe on growth are the various tolls on financial risk. Regulators for instance order banks to have more equity for clients perceived as more risky, and credit cards financiers are more than happy to have the credit rating scores create the illusion they charge the right level of interests to their customers.

Anyway I would argue that much more important than what the financial sector has earned in profits (before the losses of the crisis are netted out) is to think on what other growth opportunities could have been financed with those trillions of dollars wasted in the housing sector only because some hustlers managed to hustle up some credit ratings made overly important by the regulators.

A question to the Professor, when the regulators impose on the banks an 8 percent capital requirement when lending to unrated citizens and zero if lending to the government... are they not exceeding their mandate? Do they have a legal right to discriminate this way?