Italy’s mostly domestic debt is denominated and must be served, in a mostly foreign currency, the euro.

Sir, Isabelle Mateos y Lago informs that “the bulk of sovereign debt is owed to Italian residents rather than eurozone governments.” “Greek debt crisis echoes resound in Italy’s face-off with Brussels” October 25.

EU’s authorities assigned to all sovereigns using the euro, by means of something called “Sovereign Debt Privileges”, for purposes of the risk weighted capital requirements for banks, a 0% risk weight

The only way one could foreseeable defend such outright statist idiocy, is with the argument that nations are always able to nominally pay their debt by printing themselves out of too much debt. Unfortunately these euro nations do not have their own euro-printing machine.

The challenges with the adoption of the euro twenty years ago were immense and surely known by many. Myself, far away from Europe, in Venezuela, in November 1998 published an Op-Ed titled “Burning the bridges in Europe”. In it 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.”

So here we are with mindboggling little having been done to solve the euro challenges. Pushing more debt on needing sovereigns basically just kicked the can containing the euro’s problems down the road.

Mateos y Lago concludes: “Italy is too big and strong to be pushed around. So Italians will decide their own fate. The others should redouble efforts to survive this potential wrecking ball. This means adopting European Stability Mechanism instruments that would allow near instant access to OMT to well-run countries suffering from contagion, and provide some form of collective insurance against bank runs for institutions that meet agreed criteria” Indeed but that is again just pushing the euro challenge forward upon the next in line.

That, to me, sounds just like “Let’s kick the euro-problem can down the road again!”

Sir, as I’ve told you many times before, it is also mindboggling how in all the overheated Brexit/Remain discussions, so little attention has been given to the EUs very delicate conditions

@PerKurowski

What Europe and America need is to return to straightforward conventional bank regulations

Sir, I refer to Wolfgang Münchau’s “Why Europe needs to try unconventional policy” November 18.

In it Münchau writes, with respect to a further cut by ECB of the interest rate that “We are in a situation of diminishing marginal returns”. And later he observes that “Since small and medium-sized companies in the eurozone are heavily reliant on bank finance, they are beyond the direct reach of a [QE]”.

Why is it so hard for some to connect the dots? Are they afraid of the picture they might find?

Those who can provide the highest marginal returns are the small and medium-sized companies, entrepreneurs and start ups, and who are in fact heavily reliant on bank finance, more so in Europe than in USA. And so the reason the returns are dropping, in Europe and in USA, is that those previously mentioned and who are in fact heavily reliant on bank finance, more so in Europe than in USA, have seen their access to bank credit seriously cut off by the risk-weighted capital requirements for banks.

Risk weighing capital requirements, which translates into banks being able to earn much much higher risk adjusted returns on their equity when lending to what is perceived as “absolutely safe” than when lending to what is perceived as risky is a loony unconventional concept that has only been around for about three decades but that really went crazy with the approval in 2004 of Basel II.

What Europe and America most need is instead return to what is really conventional, namely allowing the banks to discriminate on their own based on perceived risks, without the regulator reusing the same perceived risks for the purpose of determining the capital requirements.

All public intervention profits could later turn out to be just other can-kicked-down-the-road losses.

Sir, I refer to Andreas Utermann´s “Risky bailouts can deliver a hefty profit for central banks” July 23.

The article is based on the presumption that those interventions where the government has made some profits are good, and that those were it has lost, are bad.

Unfortunately it is not as simple. In effect some of the profitable interventions could easily turn out to be the most expensive if for instance they just kept in place some who should have benefitted from retiring.

Does this make me an enemy of all government interventions? Absolutely not! It all just stops me from being an automatic congratulant of these.

We should also remember that evaluating any current government action, when ordinary economic realities have been suspended by programs such as quantitative easing, is an extremely hazardous thing to do.

In short the truth is that all current profits derived from public interventions, could later just turn out to be other can-kicked-down-the-road losses.