In the Eurozone there are many ticking debt bombs.

Sir, I refer to “Europe’s plan: com­plete its single mar­ket” by Barbara Moens and Alice Hancock, FT Big Read June 24, 2025. It states that “Three decades after it was launched, hun­dreds of bar­ri­ers still per­sist within the EU. 

November 1998, few weeks before that launch, in an Op-ed titled “Burning the bridges in Europe”, I wrote: “The Euro has one characteristic that differentiates it from the Dollar. This characteristic makes me feel less optimistic as to its chances of success. The Dollar is backed by a solidly unified political entity, i.e., the United States of America. The Euro, on the other hand, seems to be aimed at creating unity and cohesion. It is not the result of these.”

Years later, during the 2018 Winter Olympics, seeing/hearing Sofia Goggia singing her Italian national anthem with such enthusiasm, that opinion got reinforced. Frankly, now 2025, how many Europeans know and sing EU’s anthem Joy to the World as theirs?

In the referenced Op-Ed I also wrote: “Exchange rates, while not perfect, are escape valves. By eliminating this valve, European nations must make their economic adjustments in real terms. This makes these adjustments much more explosive.”

And that was before I knew that, amazingly, even if none of the Eurozone sovereigns can print Euros on their own, EU’s bank regulators, for Basel’s risk weighted bank capital/equity requirements, decreed a 0 percent risk weight. What ticking debt-bombs! Imagine if US had done so with the debt of its 50 states.

Sir, could Brexit have happened if Britain had also burned its bridges by adopting the Euro? 

Sir, Bulgaria has no idea into what it wants to get into.

Sir, with bank regulations based on the Eurocrats knowing better what to do with credit, for which repayment they’re not personally responsible for, than EU’s private sectors, what chance does Europe have?

 

What if the State of Maryland USA, where I live, was treated by the Fed as Italy is by its EU bank regulators?

Sir, Tony Barber writes: “Paradoxically, as Italy’s debt has ballooned in size, it has become more manageable. Particularly over the past two years, the crucial factor has been European Central Bank support” “Reforms and ECB help are key to Italy debt sustainability” February 25.

Although already Maryland, as all other US states is already treated quite (too) generously by bank regulators, since it cannot print dollars on its own, the capital banks need to hold when lending to it, do at least depends on its credit ratings. 

Not so in the Eurozone. Though none of its sovereigns, like Italy, can print euros on their own, and independent of their credit ratings, the banks in EU can lend to all Eurozone sovereigns, against zero capital. Something much agreed by and pushed by Mario Draghi.

It’s been hard for me to understand, especially after Brexit, why FT has kept so much silence on this Eurozone’s sovereign debt ticking bomb.

@PerKurowski

About Italy, there are serious questions that FT, and others, should not silence.

Sir, I refer to “Draghi plots €221bn rebuilding of Italy’s recession ravaged economy” Miles Johnson and Sam Fleming, and to “Europe’s future hinges on Italy’s recovery fund reforms”, Andrea Lorenzo Capusella, FT April 22, and to so many other articles that touch upon the issue of Italy’s future, in order to ask some direct questions.

Do you think Italy’s chances of a bright future lies more in the hands of Italy’s government and its bureaucrats, than in hands of e.g., Italian small businesses and entrepreneurs?

I ask this because, with current risk weighted bank capital requirements, regulators, like Mario Draghi a former chairman of the Financial Stability Board, arguably arguing Italy’s government represents less credit risk, do de facto also state it is more worthy of credit. I firmly reject such a notion.

Yes, Italy clearly shows a stagnant productivity, but could that be improved by in any way increasing its government revenues?

Italy, before Covid-19, showed figures around 150% of public debt to GDP and government spending of close to 50% of GDP. I am among the last to condone tax evasion… but if Italian had paid all their taxes… would its government represent a lower share of GDP spending, and do you believe its debt to GDP would be lower?

One final question: Sir, given how Italy is governed, excluding from it any illegal activities such as drug trafficking, where do you think it would be without its shadow eeconomy, its economia sommersa? A lot better? Hmm!

PS. As you know (but seemingly turn a blind eye to), Italy’s debt, even though it cannot print euros on its own, has, independent of credit ratings, been assigned by EU regulators, a 0% risk weight.

By not asking all the questions that need to be asked, journalists also fail society.

Sir, Henry Manisty writes “financial journalism plays a vital role in upholding the integrity of financial markets”, “EU regulators have form on obstructing journalists” November 9.

Indeed, but in many respects, financial journalists have often failed society by not doing that. For instance, here are just three examples of questions that should have been posed directly to the regulators, long ago.

We know that those excessive bank exposures that can be dangerous to banks and bank systems are always created with assets perceived as safe, never ever with assets perceived as risky. Therefore, can you please explain your risk weighted bank capital requirements based on that what’s perceived as risky is more dangerous than what’s perceived as safe?

Before risk weighted bank capital requirements credit was allocated on the basis of risk adjusted interest net margins and a view on the portfolio. After that it is allocated based on risk adjusted returns on equity; which obviously those that banks can leverage less with, e.g. “risky” SMEs and entrepreneurs. Explain how this does not distort the allocation of bank credit?

Even though none of Eurozone sovereigns can print euros on their own, for your risk weighted bank capital requirements you decreed a zero-risk weight for all of their debts. What do you think would have happened in the USA if it had done the same with its 50 states?

Sir, paraphrasing Upton Sinclair one could say that “It's difficult to get a journalist to ask something, when his salary, or being invited to Davos, depends on his not asking it.”

PS. My 2019 letter to the Financial Stability Board (FSB)

The doom loop between government and banks was created by regulators.

Sir, I refer to Martin Arnold’s “Soaring public debt poised to heap pressure on eurozone, ECB warns” May 27

For the risk weighted bank capital requirements, all Eurozone sovereigns’ debts have been assigned a 0% risk weight, and this even though none of these can print euros on their own. Would there be a “doom loop” between governments and banks if banks needed to hold as much capital when lending to governments as they must hold when lending to entrepreneurs? Of course not!

In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, in May 2011 Sharon Bowles, the then European Parliament’s Chair Economic and Monetary Affairs opined:

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

In March 2015 the European Systemic Risk Board (ESRB) published a report on the regulatory treatment of sovereign exposures. In the foreword we read:

"The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. 

The report recognises the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. 

I trust that the report will help to foster a discussion which, in my view, is long overdue.

Mario Draghi, ESRB Chair"

Six years later, and now even more “long overdue”

Never create a dependency on something that might not be able to deliver.

Sir, this would be my response to Poland’s prime minister Mateusz Morawiecki’s “Setting an EU budget is about more than arithmetic” February 20.

Prime minister I would agree with most here stated but, if I were a prime minister of Poland, the first question I would make before any budget discussion would be:

Eurozone, how do you intend to disarm that bomb of all Eurozone sovereign’s debts, for purposes of bank capital requirements, having been assigned a zero percent risk weight, even though none of these can print euros on their own will? 

If that bomb is not disarmed, EU might sadly end up as a failed intellectual fantasy, something which could have horrible consequences.

Or Prime Minister, let me put it like this: 

A budget does wittingly or unwittingly always create some kind of dependency, and the last thing a government should do, for the nation or for its citizens, is to create a dependency on something that might not be able to deliver. 

PS. Just think about all that dependency on pensions and social security people have, and that will not be delivered.

PS. I am a Polish citizen who does not speak Polish because of a gender issue. My mother tongue, which I speak fluently, is Swedish.

@PerKurowski

If US’s 50 states had been assigned a 0% risk weight, as was done in the Eurozone, where would America and the US dollar be?

Sir, Gyorgy Matolcsy opines: “Two decades after the euro’s launch, most of the necessary pillars of a successful global currency — a common state, a budget covering at least 15-20 per cent of the Eurozone’s total gross domestic product, a eurozone finance minister and a ministry to go with the post — are still missing.”, “It is time to recognise that the euro was a mistake”, November 4.

Bad as that is, it’s still much worse. Even if all those “necessary pillars of a successful global currency” were present the euro would still be in serious trouble. This a result of the sovereign debt privilege of the 0% risk weight that for purposes of bank capital requirements was assigned to all Eurozone nations, even though none them can really print euros on their own.

Sir, if all USA’s 50 states had been assigned a similar 0% risk weight, as was done in the Eurozone, where would America and the US$ be?

http://teawithft.blogspot.com/2019/06/the-still-ticking-0-risk-weight.html

@PerKurowski

Well-invested small savings surpluses are better than big ones thrown away at fluffy sovereign spending projects.

Sir, Martin Wolf correctly points out “Without the shelter of the eurozone, the Deutschmark would have greatly appreciated in a low-inflation world” “How Germany avoided the fate of Japan” October 30.

Indeed it would have appreciated, but that does not necessarily mean that it would have been bad for Germany… or for the rest in the eurozone.

Wolf holds that Germans need to realize “that the euro is already working to their benefit, by stabilising their economy, despite its huge savings surpluses.”

Q. Without the euro would those huge savings surpluses exist? A. No!

Q. Without the euro could not whatever smaller saving surpluses have resulted much better invested? A. Yes!

Wolf points out: “Even at ultra-low interest rates, domestic private investment in Germany fell far short of private savings. [And] since the government too ran fiscal surpluses, in Germany, capital outflows absorbed all the private surplus [much through] German financial institutions, with their huge foreign assets”

And that’s their problem. Because of risk weighted bank capital requirements that favors financing the safer present over the riskier future, plus that insane debt privilege of a 0% risk weight assigned to all Eurozone’s sovereign debts, even though none of these can print euros, most of those German saving surpluses ended up financing mediocre eurozone governments… and building up such unsustainable huge debt exposures, that it will come back to bite all, the euro, perhaps the EU, and of course Germans too.

The day when Germans citizens realize the real meaning of that their banks need to hold around 8% of capital when lending to German entrepreneurs, but need zero capital lending to eurozone sovereigns, and that they will not be able to collect on those loans, those German citizens are going to be very wütend.

.And Sir, again, for the umpteenth time, Wolf returns to his: “The chance to borrow at today’s ultra-low long-term interest rates is a blessing, not a curse.” 

Wolf just refuses to accept that today’s ultra-low long-term interest rates, is an unsustainable artificial concoction that mainly benefits public debts, in other words, pure unabridged statism, based dangerously on that government bureaucrats know better what to do with credit, for which repayment they are not personally responsible for, than for instance the private entrepreneurs. When it comes to bank regulations a Communist Wall was constructed in 1988, one year before the Berlin Wall fell.

PS. The Euro had one characteristic that differentiated it from US$. That made me less optimistic as to its chances of success. The US$ is backed by a solidly unified political entity, USA. The Euro was aimed at creating unity and cohesion, not the result of it.

@PerKurowski

What the Eurozone would need a common budget the most for, is to help rescue many of its members from their huge risky 0% risk weighted sovereign debts.

Sir, Martin Arnold reports that Mario Draghi, “the outgoing ECB boss repeated his call for eurozone governments to create a sizeable common budget that could be used to provide greater economic stability in the 19-member currency zone by supporting monetary policy during a downturn.” “ECB chief Draghi uses swansong to call for unity” October 29.

As I see it the eurozone, unwittingly, already had a sizable non transparent common budget, namely that of, for purposes of risk weighted bank capital requirements, having assigned to all eurozone sovereigns’ debts, a 0% risk-weight, even though none of these can print euros on their own.

Some of these sovereigns used that privilege, plus ECB’s QE purchases of it, to load up huge debts at very low interest rates, so as to spend all that money. Now things are turning hard for many of these. Greece was small and walked the plank, and had to mortgage its future. Italy might not be willing to do so. There is a clear redenomination risk, and it is being priced more and more. 

So when Draghi now says “We need a euro area fiscal capacity of adequate size and design: large enough to stabilize the monetary union” it is clear he is very subtle referring to the dangers of the euro breaking down.

But when Draghi mention that fiscal capacity should be designed as not “to create excessive moral hazard”, then its harder to understand how that moral hazard could be worse than that already present in that idiotic 0% risk weighting.

What is clear is that for a eurozone common budget to serve any real purpose, those privileged 0% risk weights have first to be eliminated.

Just like it is hard to see some states with good credit standing accepting a 0% risk weight of other in much worse conditions, it would be difficult to explain for instance to Germans why their banks need to hold around 8% in capital when lending to German private entrepreneurs, but no capital at all when lending to the Italian or Greek governments.

How to do that? Not easy but my instincts tell me it begins by allowing banks to keep all their current eurozone sovereign debts exposures against zero capital, but require these to put up 8% of capital against any new purchases of it. That would freeze bank purchases, put a pressure on interest rates to go up, and allow the usual buyers of sovereign debt to return to somewhat better conditions.

But, of course, that might all only be pure optimistic illusions, and all eurozone hell could break out. 

@PerKurowski

The dangerous distortions in the allocation of credit that risk weighted bank capital requirements cause, is seemingly something that shall not be discussed.

... not even by those former central bankers who refuse to fade away

Sir, with respects to “the attack on the European Central Bank’s by six former central bankers” you write “Only one thing can match the stature of the complainants and that is the hollowness of their complaint.” “The euro’s guardians face a roar of the dinosaurs” October 7.

In their memo we read: “The negative impact of the ultra-low interest environment extends from the banking system, through insurance companies and pension funds, to the entire financial sector. The re-distribution effects in favour of owners of real assets, create serious social tensions. The young generations consider themselves deprived of the opportunity to provide for their old age through safe interest-bearing investments… and also furthers a ‘zombification’ of the economy”

Of course in the short run low and even negative interest rates benefit those who borrow more than those who save but, hopefully, one always hopes that will be made up in the future, by means of increased productivity and economic growth.

Significantly though the “dinosaurs” left out mentioning the distortions in the allocation of credit produced by the risk weighted bank capital requirements, which benefits especially the borrowings of sovereigns, that which FT does not want to discuss either. 

I ask. Where would the Europe/Eurozone’s interest rates on sovereign be if banks, as it was for around 600 years before 1988’s Basel Accord, needed to hold the same amount of capital against loans to the sovereigns, currently 0%, than against loans to unrated European entrepreneurs, currently 8%? Dare try thinking about that. Ask your own journalists to try to answer that question.

And neither do they discuss the special case of the 0% risk weight assigned to all Eurozone sovereigns’ debts, even though none of these can print euros. Could it be because of a bad conscience?

And with respect to the young generation what it really should be up in arms against, are the much lower capital requirements for banks when financing the safer present than when financing that riskier future on which its good outcome the young really depend on.

@PerKurowski

Two regulations will turn the beautiful dream of the European Union into a nightmare.

Sir, Ignazio Angeloni writing that “The ECB houses hundreds of experienced, dedicated [bank] supervisor” blames “fundamental weakness in the underlying laws and the “resolution” framework for dealing with ailing banks” for many of EU’s bank troubles. “A common thread runs through diverse EU financial misfortunes” September 13.

The lack of a good resolution framework is a problem when trying to solve difficulties but much worse is that which causes the problems, in this case two regulations that are endangering Europe and the euro. Seemingly none of EC’s experts were capable of doing anything about it.

First, something that also affects most other economies, the Basel Committee’s risk weighted bank capital requirements. These seriously distort the allocation of credit, and, to top it up, are stupidly based on that what’s ex ante perceived as risky is more dangerous ex post to our bank systems than what’s perceived as safe. 

And second, in this case only a homemade EU concoction, the lunacy of all times of having assigned a 0% risk weight to all Eurozone sovereigns’ debts, even though all that debt is not denominated in  their local/printable/fiat currency.

@PerKurowski

How can Eurozone’s sovereigns’ debts, not denominated in their own national/printable fiat currency, be considered 100% safe?

Sir, Laurence Fletcher in Tail Risk of August 28, writes: “Yields on German Bunds and other major government bonds have been moving steadily lower, as prices rise. That has burnished their credentials… as a safe haven in uncertain times”

Sir, how can Eurozone’s sovereigns’ debts, which are not denominated in their own national/printable fiat currency, be considered safe? 

The reasons the interest rates on that debt is low is the direct result of regulatory statism.

Risk weighted bank capital requirements that much favor the access to bank credit of the sovereign over that of the citizens.

That the European Commission assigned a Sovereign Debt Privilege of a 0% risk weight to all Eurozone sovereigns, even when these de facto do not take on debt in a national printable currency.

That ECB’s, with its QEs, have bought up huge amounts of Eurozone sovereign debts.

What would the interest rates on eurozone sovereign debt be if banks had to hold as much capital against their debts, than what they need to hold against European entrepreneurs?

@PerKurowski

With respect to Eurozone sovereign debts, European banks were officially allowed to ignore credit ratings.

Sir, Rachel Sanderson writes, “Data from the Bank of Italy on holdings of Italian government debt, usually the prime conduit of contagion, suggests any Italian crisis now will be more contained than in the 2011-12 European debt and banking crisis, argue analysts at Citi” “Rome political climate is uncomfortable even for seasoned Italy Inc.” August 22.

“But Citi [also] warns of sovereign downgrades. Italy is now closer to the subinvestment grade rating threshold compared with 2011, according to all three main rating agencies.”

But the European authorities, European Commission, ECB all, for purposes of Basel Committee’s risk weighted bank capital requirements, officially still consider Italy’s debt AAA to AA rated, as they still assign it a 0% risk weight.

So in fact all the about €400bn of Italian government debt Italian banks hold, and all what the European financial institutions hold of about €460bn of Italian sovereign debt, most of it, are held against none or extremely little bank capital. Had EU followed Basel regulations they would have at least 4% in capital against these holding, certainly way too little. Lending to any private sector Italian would with such ratings would require 8% in capital… the difference is explained by the pro-state bias of the Basel Committee. 

And that is a political reality that must also be extremely uncomfortable for the not sufficiently seasoned European Union Inc.

Sir, what will the rest of Europe say when they realize that it was not all Italy’s fault, as it was not all Greece’s fault?

@PerKurowski

Any new IMF managing director should at least know, as a minimum minimorum, that two current important financial policies are more than dumb.

Sir, I refer to John Taylor’s “Choice of new IMF head must not be dictated by the old EU order” August 12.

I have no problems whatsoever with all what Taylor argues and neither with IMF changing its bylaws to allow someone over 65 years to take up the post of managing director.

But I do have two very firm ideas about what the next managing director should know.

First, that the risk weighted capital requirements for banks, based on that what’s perceived as risky, like loans to entrepreneurs and SMEs, is more dangerous to the bank system than what’s perceived as safe, like residential mortgages, is more than dumb. These only guarantee a weakening of the real economy and especially large bank crises, caused by especially large exposures to something perceived, decreed or concocted as especially safe, which turns into being especially risky, while held against especially little capital.

Second, that to assign a 0% risk weight, as that which has been assigned by EU authorities to all eurozone sovereigns, and this even though these take on debt that de facto is not denominated in their own domestic printable currency, something which could bring down the Euro and the EU with it, is also more than dumb. 

Sir, I wonder if anyone of the G20 Eminent Persons Group, international worthies and the names Taylor mention understand and know this. And if they do, why are they silent on it?

@PerKurowski

If ECB’s original QEs stimuli had not been distorted by credit risk weighted bank capital requirements, there would be much less need for additional QEs.

Sir, Claire Jones writes: “EU treaties prevent the ECB from financing member governments by buying their debt, a tactic known as monetary financing. This rule aims to protect the central bank from political pressure and avoid stoking inflation. QE involves the central banks of eurozone states buying huge amounts of government bonds, financed by the ECB”… [Is QE legal?] “ECB argues that QE does not amount to monetary financing as it is only buying the bonds in secondary markets from other investors, rather than purchasing the debt directly from governments”, “Easing German constitutional court to rule on ECB bond buying” July 31.

Sir, as clearly the intent of ECB is to help financing member governments, and “stoking inflation” a publicized goal, I must say that sounds like a real weak defense.

But be that as it may, the question is also whether QE really helps the recovery in a sustainable way? ECB’s still so large outstanding ECB holdings of European sovereign debt suggest it does not. 

The main explanation for that is to be found in the many dangerous distortions in the allocation of bank credit that the risk weighted bank capital requirements produce.

Just an example, currently all Eurozone sovereigns, courtesy of EU authorities, have been assigned a Sovereign Debt Privilege of a 0% risk weight, and this even though not of them take on debt denominated in a currency that is their own printable one.

The sum of QEs, plus that regulatory favoring, basically premised upon the notion that European government bureaucrats know better what to do with money they are not personally responsible for than for instance European entrepreneurs is drowning Europe in way too much statism.

For the European Union to be saved financial power has to be taken away from its sovereigns (and Brussels) and devolved to its citizens.

http://teawithft.blogspot.com/2019/06/the-still-ticking-0-risk-weight.html

@PerKurowski

The case against insane globalism also remains strong.

The purpose of the Basel Committee for Banking Supervision BCBS, established in 1974 is to encourage convergence toward common approaches and standards. That sure reads as it could qualify as that global cooperation Martin Wolf asks for in his “The case for sane globalism remains strong” July 16.

But what if it is not sane?

BCBS has basically imposed on the world the use of credit risk weighted capital requirements for banks.

Since perceived credit risks are already considered by bankers when deciding on the interest rate and the size of exposures they are willing to hold, basing the capital requirements on the same perceived credit risks, means doubling up on perceived credit risks. 

And Sir, as I have argued for years, any risk, even if perfectly perceived, causes the wrong actions, if excessively considered. 

I dislike the concept of any kind of weighted different capital requirements, because that distorts the allocation of credit with many unexpected consequences. But if we wanted to have perceived credit risk to decide bank capital, it would of course have to be based on the conditional probability of what bankers are expected to do when they perceive credit risks, and these might be wrongly perceived.

Would we in such a case assign a 20% risk weight to what is rated AAA and a whopping 150% to what is rated below BB- as in Basel II’ standards? Of course not!

And if we did not think that government bureaucrats know better what to do with bank credit they are not personally liable for, than entrepreneurs, would we then assign the “safe” sovereign a 0% risk weight and the “risky” not rated entrepreneur a risk weight of 100%, which would clearly send way too much credit to sovereigns and way too little to entrepreneurs? Of course not!

And if we thought having a job as important or even more so than owning a house, would we then allow banks to leverage so much more with residential mortgages than with loans to small and medium enterprises, meaning banks can obtain easier and higher risk adjusted returns on their equity by financing “safe” houses than by financing “risky” job creation? Of course not!

Sir, in 2003, when as an Executive Director of the World Bank I commented on its Strategic Framework I wrote: "A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind."

Does this mean that I do not agree with Martin Wolf when he argues in favor of multilateral co-operation? Of course not! But it sure argues for being much more careful when going global with plan and rules.

By the way in those same 2003 comments at the World Bank I also wrote: “Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market”. And it did not take the world long before drowning in 2007 and 2008 in the AAA rated securities backed with mortgages to the subprime sector in the U.S.

But have those who concocted those ill suited risk weighted bank capital requirements ever admitted a serious mea culpa? No, they have blamed banks and credit rating agencies.

And in EU the authorities assigned a 0% risk weight to all Eurozone sovereigns even though they all take up debt that is not denominated in their local printable currency. And no one said anything?

Sir, in the whole world, I see plenty of huge dangers and lost opportunities that can all be traced back directly to BCBS risk weighted bank capital requirements. 

So, besides having to be very careful when going global, we also have to be very vigilant on what the global rulers propose. Of course, for that our first line of defense are the journalists daringly questioning what they do not understand or like.

Has FT helped provide sufficient questioning about what the Basel Committee has and is up to? I let you Sir answer that question.

http://subprimeregulations.blogspot.com/2003/03/my-comments-on-world-banks-strategic.html

@PerKurowski

Does Christine Lagarde really know about the zero risk weighting of eurozone sovereigns bomb?

Sir, Anne-Sylvaine Chassany writes how Christine Lagarde was interrogated in 2016 about an incident while she was the finance minister in France, related to a vital memo she missed, and which led to herfailing in “preventing an allegedly fraudulent €403m state payout”. “Although spared prison and a fine, she was found guilty of negligence, though the court decided the conviction would not constitute a criminal record” “Lagarde’s lesson in how to deal with imposter syndrome” July 10.

That must have been a very uncomfortable experience for Ms. Lagarde. And in this respect I wonder if she has for instance read what Sharon Bowles the then European Parliament’s Chair Economic and Monetary Affairs Committee opined in 2011?

In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, 2 May 2011 Bowles said: 

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

Sir, that was eight years ago… and Mario Draghi or anyone else did not defuse that bomb and so it is still ticking.

A zero risk weighting of any sovereign bond, for purposes of bank capital requirements anywhere is lunacy to me, as it de facto implies believing that government bureaucrats know better how to use bank credit they are not personally liable for, than for instance entrepreneurs. But, when it is assigned to sovereigns who take on debt denominated in a currency that is not their domestic printable one, as is the case in the eurozone, then it goes way beyond lunacy.

Anne-Sylvaine Chassany writes that againChristine Lagarde faces a chorus of doubters. Ms Lagarde is not a monetary policy specialist or an economist by training, skills which, in a perfect world, ought to be part of the job description to succeed Mario Draghi at the helm of the European Central Bank.

That is of little concern to me; there should be more than enough monetary policy specialist or economists and, seeing what many of them have been up to lately, perhaps even too many. 

But does Ms Lagarde really know what she is getting into? Does she really think she can help defuse that zero risk weighting for eurozone sovereign bonds bomb that, if it explodes, will take down the euro, and perhaps the European Union with it?

Someone should ask her that. That is many times more important than the vital memo she missed seeing. Why not the Financial Times?

But then again would anyone really be able to defuse that bomb?

PS. Perhaps the title of this should be "Does Christine Lagarde know she might be on a suicide mission?

@PerKurowski

In the Eurozone’s sovereign debt mine there is a choir of canaries going silent but, seemingly, that shall not be heard.

Sir, Gideon Rachman concludes, “Almost all of the modern threats — from a resurgent Russia to climate change and trade wars — are much easier for Britain to deal with, by using the collective strength of the EU.” “Brexit is an idea left over from a bygone era” June 25, 2019.

That is correct, but only if we exclude mentioning the problems within Europe. I refer specially to the sovereign debt bombs that are ticking within the Eurozone, the agents of “the EU’s most federalising project — the euro.”

Yes, that Germany “is stubbornly resisting demands from Brussels and Paris for deeper economic union” does surely not help but the real problem is that the biggest problem with the Euro, is not really acknowledged. 

When Greece turned into a dead coalmine canary, how much discussion were there about the fact that EU authorities had assigned Greece, as to all other Eurozone sovereigns, for purposes of bank capital requirements, a 0% risk weight? And that 0% risk weight was decreed even though all Eurozone sovereigns contract debt denominated in a currency that de facto is not their own domestic printable one.

Basically no discussion at all even though that 0% risk weight guarantees European banks are going to lend way too to the Eurozone’s sovereigns. Greece was small and ended being forced by ECB to walk the plank. But if Italy’s debt bomb explodes would it accept doing so? I doubt it.

Sir, to be a Remainer without requesting from EU a clear plan on how to defuse that still ticking debt bomb that could take the Euro down and perhaps the EU with it, seems not to be a very respectful position either.

@PerKurowski

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

The still ticking 0% Risk Weight Sovereign Debt Privilege bomb awaits Mario Draghi’s successor at ECB

Sir, Martin Wolf, sort of implying Mario Draghi followed his recommendations, which of course could be true, holds that “Draghi did the right things, above all with his celebrated remark in July 2012 that ‘within our mandate, the ECB is ready to do whatever it takes to preserve the euro’”. “Jens Weidmann casts a shadow over the ECB” June 11.

Did Draghi resolve that crisis for the better, or did he just postpone it for the worse?

That’s is not at all clear. In March 2015 the European Systemic Risk Board (ESRB) published a “Report on the regulatory treatment of sovereign exposures.” Let me quote from its foreword:

“The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. 

The report recognizes the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. 

I trust that the report will help to foster a discussion that, in my view, is long overdue.” Signed Mario Draghi, ESRB Chair

The regulatory aspect that report most refers to is, for purposes of risk weighted capital requirements for banks (and insurance companies), the assignment of a 0% risk weight to all Eurozone sovereigns. 

Though the report states that: “Sovereign defaults… have occurred regularly throughout history, including for sovereign debt denominated and funded in domestic currency”, it does not put forward that all these eurozone sovereign debts are denominated in a currency that de facto is not a domestic printable one of any of these sovereigns.

Since Mario Draghi seems to have done little or nothing since then to diffuse this 0% Sovereign Debt Privilege bomb, which if it detonates could bring the euro down, and with it perhaps EU, this is the most important issue at hand. 

So when choosing a candidate to succeed Draghi as president of ECB the question that has to be made is whether that person is capable enough to handle that monstrous challenge. Who is? Jens Weidmann? I have no idea.

Sir, it would be interesting to hear what Martin Wolf would have to say to the new president of ECB about this. What would a “Do what it takes” imply in that case? 

PS. And when Greece was able to contract excessive debt precisely because its 0% risk weight should not the European Union have behaved with much more solidarity, instead of having Greece walk the plank alone?

PS. If I were one of those over 750 members of the European Parliament here are the questions I would make and, if these were not answered in simple understandable terms, I would resign, not wanting to be a part of a Banana Union.

PS. "The current regulatory framework may have led to excessive investment by financial institutions in government debt." Really?

PS. Is there a way to defuse that bomb? Perhaps but any which way you try presents risks. One way could be to allow all banks to continue to hold all eurozone sovereign debt they current posses, against a 0% risk weight, until these mature or are sold by the banks; and, in steps of 20% each year, bring the risk weight for any new sovereign debt they acquire up until it reaches 100%... or more daringly but perhaps more needed yet set the risk weight for any new sovereign debt acquired immediately to 100%, so as to allow the market to send its real messages. 

The same procedure could/should be applied all other bank assets that currently have a risk weight below 100%, like for instance residential mortgages.

Would it work? I don’t really know, a lot depends on how the market prices the regulatory changes for debt and bank capital . But getting rid of risk weighted bank capital requirements is something that must happen, urgently, for the financial markets to regain some sense of sanity.

PS. An alternative would be doing it in a Chilean style. Being very flexible with bank capital requirements, even accepting 0%, even having ECB do repos with banks non-performing loans: BUT NO dividends, NO buybacks and NO big bonuses, until banks have 10% capital against all assets, sovereign debts included.

PS. I just discovered that Sharon Bowles, MEP, 
Chair Economic and Monetary Affairs Committee
 of the European Parliament, in a speech titled "Regulatory and Supervisory Reform of EU Financial Institutions – What Next?
 at the Financial Stability and Integration Conference,
 2 May 2011, said the following:

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

That is very clear warning that something is extremely wrong... and yet nothing was done about it.

PS. And in 2015 the European Commission also described the problem with the zero-risk weighted sovereign debts within the eurozone.

PS. https://perkurowski.blogspot.com/1998/11/burning-bridges-in-europe.html

PS. In Financial Times 2004: “How long before regulators realize the damage, they’re doing by favoring so much bank lending to the public sector? In some countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits”

The empowerment of the Bureaucracy Autocracy

“Assets for which bank capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities” Paul Volcker

@PerKurowski