Lacking a sufficiently large safe haven the Eurozone needs to stop its retrenchment.

Sir, Wolfgang Münchau, in “What happens if Angela Merkel does get her way”, June 18, asks “Why should citizens leave their money in local banks, when foreign investors are pulling out and when even the EU is making preparations to impose capital controls?” Indeed, why? But, worse so, why should they do it when bank regulators in Europe, by means of the capital requirements for banks based on perceived risk, have for a long time been ordering a European retrenchment to safety, foolishly believing that to be possible? 

It is of course the whole Eurozone that is in danger, as there is no way the Europe would find a sufficiently large safe haven for all. And this is why I have often found reason to mention that perhaps the Eurozone should not concern itself so much solely with Greece, Spain, Italy and Portugal, but more proactively try to find a more general solutions, based for instance on a Euro II, or a Euro-North and a Euro-South.

That could perhaps provide it with the tools to get out of this horrendous mess, detonated by bank regulations which among other allowed European banks to lend to Greece leveraging their equity a mindboggling 62.5 to 1... a mess made so much worse by now requiring they reduce to a 12.5 to 1 leverage or less that same exposure.

Is it not time for Euro II?

Sir, Wolfgang Münchau, in “How Europe is now leveraging for a catastrophe” correctly paints scenarios so horrendous we wish we all were just having a nightmare. 

What if we could wake up and find a Euro II, with all European governments, Germany included, having given their creditors exactly the same haircut, for instance 40 percent, and used the excessive hair-cut in some countries, to compensate for the insufficient haircut in others. 

Why not? The bank regulations that allowed European banks to lend to Greece against only 1.6 percent capital, an authorized leverage of 62 to 1, and which of course pushed to create Greece’s excessive debts, were not just a Greek idea but a shared European one. 

And if thereafter Europe helps to avoid a repeat… like for instance requiring bankers to put up exactly the same capital when lending to a European sovereign as it has to put up when lending to a European small business or entrepreneur… could we all not wake up, hurting a lot, but at least looking forward immediately to a better future?


PS. This was written before I knew of the Sovereign Debt Privilege that assigned all eurozone sovereigns a 0% risk weight even if they were taking on debt denominated in a currency that de facto was not their own domestic printable one. That was even crazier than Basel I or II.