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

Greece’s “NO!”, to be useful, must foremost be a “NO!” to the Basel Committee’s pro-government biased bank regulations.

Sir, Nick Malkoutzis writes: “Greeks…need to hear something more hopeful than talk of more spending cuts and tax rises.” “Greeks deserve more than threats of further hardship” July 6.

Spending cuts and tax rises can indeed strengthen the finances of a government, but, if it does not go hand in hand with the strengthening of its private sector economy, which is what supplies its sustainability, it all becomes a exercise in futility.

How did Greece get into the hole? By European bank regulators telling the banks they were required to hold much less capital when lending to the Greek government than when lending to the Greek private sector… and so the banks duly responded and, in relative terms, lent much too much to the Greek government and too little to the Greek SMEs and entrepreneurs.

And so now Greece must wake up to the fact that, no matter what dumb self-serving Euro/Basel technocrats believe, the private sector makes better use of bank credit than government bureaucrats. And so the “NO!”, if it is going to be useful, must foremost be a “NO!” to the Basel Committee’s pro-government biased bank regulations.

And if the ECB really wants to help, they should device a plan to recapitalize Greek banks… after all one of its super-technocrats, is Mario Draghi who, as former chair of the Financial Stability Board, is co-responsible for the mess Greek and other banks are in, after lending so much to governments against so little capital (equity).

@PerKurowski

Britain, frankly, don’t you think your forefathers would be ashamed of you.

Sir, I refer to Mure Dickie´s “Battle for Britain”, September 18.

As a professional, with an MBA, I left a very good paying job in my homeland Venezuela, and with the financial support of my father in law, spent a whole year with my wife in London, as an intern at Kleinwort and Benson, and studying corporate finance at London Business School, and International Economic at the London School of economics.

Now, why on earth would I do a thing like that? If I had to explain it, besides of course being alone with my wife, and the English music groups of the 60s, it would be because of Winston Churchill, the traditions of English merchant banks, and British stiff upper lips.

And therefore it has been so sad to me to observe over the last decade, how for instance the Financial Times, the paper I then eagerly read and now just read, does not care one iota about the fact that bank regulations, with credit risk based capital requirements, is making Britain into just another run of the mill risk-adverse nation.

Frankly, don’t you think your forefathers would be ashamed of you.

And then, same day, I read John Gapper admonishing “Scotland has to be braver to build strong banks”, and my reaction is… is this a joke? What about Britain recovering some of its own brave banks?

PS. How is it possible that FT finds nothing wrong with banks being able to leverage so much more their equity for what is perceived as absolutely safe than for what is perceived as risky, when those credit risk perceptions have already been cleared for with interest rates (risk premiums) amount of exposure and other terms? If you absolutely must distort with capital requirements, would it not be better to do so with a purpose, like the creation of jobs or the sustainability of mother earth?

PS. FT has been squarely in favor the NO with respect to Scottish independence. Can you imagine what we could have achieved if FT had taken a similar position on allowing some unelected regulators to distort the allocation of bank credit in our economies?