How do you square negative rates with a 0% risk weight?

Paul Horne writes, “It must be a fairly dire outlook to persuade investors to pay eurozone governments to hold their capital even as there must be doubt about Bunds and French OATs being the “safest” of investments at today’s prices.” “Investors need to be aware of the other bond bubble” June 21.

Indeed, but given the redenomination risk that would exist if the still ticking 0% Risk-Weight Sovereign Privilege assigned to Eurozone’s Sovereign bomb explodes, I guess investors might prefer being paid with Deutsche Marks than with Liras or Drachmas.

@PerKurowski

Though benefitting from the Euro, the weaker Euro-nations still pay quite a lot for Germany’s export advantages.

Sir, Paul Clifton writes about the advantages provided to German exports by the fact that other countries help to keep the Euro value down "The euro gives Germany a permanent cost advantage" August 23. That, which is entirely correct, should also have us refer to the disadvantages for those other.

In November 1998, just before the launch of the Euro, in an Op-Ed titled “Burning the bridges in Europe” I wrote: “The possibility that the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive. High unemployment will not be confronted with a devaluation of the currency, which reduces the real value of salaries in an indirect manner, but rather with a direct and open reduction of salaries or with an increase of emigration to areas offering better possibilities.”

And in November 2009, in a letter to you I asked about “what it would have looked like if for instance Greece still had the Drachma and Germany the Deutsche Mark… clearly Greece would be able to devalue and use that politically more friendly approach of being able to inflate yourself out of the problems, instead of having to impose Germanic discipline on their citizens.”

@PerKurowski

Europe, you want the truth? It was not the euro but bank regulators who did Greece in.

Sir, Gideon Rachman writes: “the link between the EU and prosperity will have been ruptured… it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment — the euro — it is now actively destroying wealth, stability and European solidarity”. “Europe’s dream is dying in Greece” June 30.

With my Op-Ed of November 1998 “Burning the Bridges in Europe” I can evidence having warned as clearly and as much as anyone about the euro… and so I could be writing here “I told you so”.

But no, I assure you that the real failed economic experiment that has created the current crisis was not the euro; it is the current bank regulations.

Basel II regulations of June 2004, because of how Greece was rated A+ to A- between November 2004 and January 2009, allowed banks to lend to Greece leveraging their equity more than 60 to 1. The capital (equity) requirement was a meager 1.6 percent (the basic 8% times a 20% risk-weight).

And so of course the Greek government was doomed to take on too much public debt. What Greek politician/bureaucrat would have been able to resists the offers of loans; and what banks would resist the temptation to offer loans to Greece, in order to earn fabulous expected risk-adjusted returns on their equity?

And let us be sincere, any bank lending to a Greek government of those of lately, has de facto waived his right to be repaid… even if he was tricked into doing so by its own regulator.

What would then have happened if there had been no Euro, and Greece had borrowed Dollars, Pounds or Deutsche Marks? The ensuing haircuts would be direct, or indirect by means of Drachma devaluations. Yes the crisis resolutions could perhaps been less traumatic but the crisis would still have happened.

Get any European country to use its own currency, but keep current distortions of bank credit in place, and they are still all doomed! If somebody needs to apologize to Europe, well that is the Basel Committee for Banking Supervision.

@PerKurowski

PS. Shortly after posting this, I found out to my amazement that even though no Eurozone nation can print euros on its own, for the risk weighted bank capital requirements, all their sovereign debts, independent of credit ratings, were assigned a 0% risk weight. Holy Moly, what if US had done the same with its 50 states?

PS. And then EU, even though their bank regulators were very much guilty of the Greek-neo-tragedy, showed no solidarity.

 

European citizens, beware of the Basel Committee’s bank regulators bearing gifts to your government bureaucrats

The single currency is still a great gamble, but Europe don’t blame it for causing the current crisis.

Sir, in November 1998, in an Op-Ed titled “Burning the bridges in Europe”, I expressed serious reservations about the single currency. Among it, because “The Euro… seems to be aimed at creating unity and cohesion. It is not the result of these.”

But I do get upset when I read a letter like that of Sir James Pickthorn “Admit it, FT – the single currency has been the most awful mistake.”

Basel II regulations of June 2004, because of how Greece was rated A+ to A- between November 2004 and January 2009, would have allowed banks to lend to Greece leveraging their equity more than 60 to 1. The capital (equity) requirement was a meager 1.6 percent (the basic 8% times a 20% risk-weight).

And so of course the Greek government was doomed to take on too much public debt. What Greek politician/bureaucrat would have been able to resists the offers of loans? What couple of banks at least would not have resisted the temptation to offer these to Greece, in order to earn fabulous expected risk adjusted returns on their equity?

What would then have happened if there had been no Euro, and Greece had borrowed Dollars, Pounds or Deutsche Marks? The ensuing haircuts would be direct, or indirect by means of Drachma devaluations. Yes the crisis resolutions could perhaps been less traumatic, but the crisis would still have happened.

Get any European country to use its own currency, but keep current distortions of bank credit in place, and they are still all doomed! If someone needs to apologize to Europe, that is the Basel Committee for Banking Supervision. If something will really bring Europe to its knees, it is not the Euro but the risk-aversion implicit in current bank regulations. 

@PerKurowski

If there is no great improvement on the youth unemployment front, Greece has no choice but to default.

Sir, Wolfgang Münchau writes that “This could be the moment for Greece to default” April 14. But when reading that “the rate of its youth unemployment in 2013 stood at 60.4 percent”, unless there has been much true progress on this front lately, the question would seem to be whether Greece has any other option.

When Münchau asks “who in their right mind is going to make a long term investment in a country with unsustainable long term debt?”, let us not forget that the most important long term investors in Greece are and should always be, the Greek youth.

By the way, as Münchau mentions “a new currency”, if I was a young unemployed Greek debating about staying or not staying in my country, I would run if what they come up with is for Greece to institute a new Drachma.

And what if an expelled Greece insists in using the euro?

Sir, Ralph Atkins discusses that the “Fear of a Greek exit could strengthen Draghi’shand” September 6. 

Again the possibility that Greece defaults, the others get mad and expel Greece from the eurozone, but Greece keeps on using the euro, is not discussed. Why? To me that sounds as the most reasonable proposition, so that Greece does also not lose what it has left marketing a hard to sell neo-drachmas. 

And why is so little discussed about making the best out of all those funds held by Greeks outside Greece? Is it that it would have been preferably that those funds had been lost too?

Greece should state it will use the euro whether the eurozone likes it or not

Sir, George Pagoulatos writes: “Of all Greece’s many problems, including austerity, the threat of leaving the eurozone is the most damaging”, “Greece should not be sacrificed for the euro” August 16. But, when asking “Would the eurozone be justified in ejecting Greece?” professor Pagoulatos seems to imply that staying with the euro is not in Greece’s hands, and that is wrong. 

The best thing that Greece could do is to announce that, if by any reason expelled from the eurozone, for instance because it has not been able to service its debt, that which was recently considered risk-free by European bank regulators, it will stick to the euro, and NOT pull a dirty quickie new drachma on anyone... something which by the way would cost Greece useless fortunes, because of its unfortunate current lack of sufficient credibility. If Montenegro can use the euro why can’t Greece?

Does Greece need permission to use the Euro?

Sir, El Salvador, Ecuador and some other countries, use the US dollar and I cannot remember them asking the US for any permissions to do so. If Greece goes into total default, perhaps it could still decide to use the Euro, it could be of great interest to them.

Is Greece becoming Germany´s fart-payer?

Sir Wolfgang Münchau writes “Greece can expect no gifts from Brussels” November 30, and which makes us reflect on what it would have looked like if for instance Greece still had the Drachma and Germany the Deutsche Mark. 

In such a case Germany would have had to be doing the Chinese styled currency weakening on its own instead of having Greece and others euro-black-sheep average the Euro down for them. And clearly Greece would be able to devalue and use that politically more friendly approach of being able to inflate yourself out of the problems, instead of having to impose Germanic discipline on their citizens. Come on, does not Greece deserve a little gift?

Rumours have it that in old Venezuela the fine ladies of society were always accompanied by a small coloured boy whom they could hit on his head whenever a lady farted. These boys were known as fart-payers (paga-peo). Could it be that Greece is becoming Germany´s fart payer?