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

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

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

If a firefighter had seen an explosive artifact, and not done anything in four years to defuse it, would he still be a paid firefighter?

Sir, as you might understand from my many letters to you I agree with most of what Ian Hirst opines on Martin Wolf’s article (“Weidmann casts a shadow over the ECB”, June 13) “ECB must end conjuring tricks and begin a structural overhaul” June 19.

Sadly though, no matter how “rock solid the political support for the euro is, it might already be too late, even for Jens Weidmann, to do all that needs to be done to correct the mistakes Hirst hints at.

Hirst writes: “As Mr Wolf points out, the German public, in particular, need to be told some home truths. The euro has greatly benefited their economy (while greatly damaging competitors in southern Europe). It does not work without some transfer and debt support elements, mainly funded by Germany and the Netherlands.”

100 percent correct but I ask, are they able to manage the whole truth? Included that of German banks being able to hold loans to for instance Greece and Italy against zero capital while being required to hold eight percent in capital or so when lending to an unrated German entrepreneur?

Sir, in March 2015 Mario Draghi wrote the foreword to an ESRB report on the regulatory treatment of sovereign exposures. In it he said “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. [It} recognizes the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets, as well as the intrinsic difficulty of redesigning regulations so as to produce the right incentives for financial institutions… I trust that the report will help to foster a discussion which, in my view, is long overdue.”

PS. “Long overdue”? We are now in June 2019 and I ask, has the Financial Times seen Mario Draghi or the ECB doing anything about the still ticking 0% Risk-Weight Eurozone Sovereign Debt Privilege bomb? 

PS. "the current regulatory framework may have led to excessive investment by financial institutions in government debt" March 2015. Why did it take so long and why did they need research to only suspect that?

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

For banks to lend to businesses it takes two to tango, liquidity and bank capital.

Sir, Valentina Romei, with respect to ECB’s targeted longer term refinancing operationswrites “According to TS Lombard: In both Spain and Italy, TLTRO borrowing corresponds to about 15 per cent of gross domestic product… Yet in both Italy and Spain, growth in commercial bank loan books has been weak”. Francesca Vasciminno, of Fitch Ratings in Milan explains it with “Partially this is the result of banks using the cheap funds “opportunistically to invest in government bonds if yields are attractive” “ECB loans fail to ignite bank lending” April 10.

Does ECB not know that banks in Italy and Spain, which as most banks are not awash with capital to say the least, need to hold 8% in capital against risk weighted assets and currently, because of EU’s insane Sovereign Debt Privileges, 0% against loans (or bonds) to their government?

There simply is no way that a TLTRO, or any other fancy program, is going to sustainably result in more and in relative equitable terms business lending by banks, without the removal of the risk weighted bank capital requirements. One might think that the introduction of a leverage ratio might have reduced its distortions but the truth is that, on the margins, there where it most counts, the distortion pressure of these has only increased.

Sir, soon for the three thousands time, before the insane risk weighted bank capital requirements disappear, there will be no muscular economic growth, which requires risky proteins, and all we will see is increased bank obesity resulting from increased exposures to safe carbs.

@PerKurowski

The selection of independent central bankers should not be politicized, but neither should the criticism of the candidates be

Sir, you argue that Stephen Moore nor Herman Cain seem to be “remotely qualified to sit in the monetary cockpit of the world’s reserve currency”, “Trump must be stopped from packing the US Fed”, April 6.

Sir, you might very well be right, I know very little about those candidates but I do know that those who have been sitting there for the last decades were perhaps not sufficiently qualified either. 

The 2008 crisis was caused by the distortions in credit allocation produced by the risk weighted capital requirements for banks. To then having central bankers to inject huge amounts of stimulus by means of QEs and ultra low interest rates, without removing those distortions, does show they don’t have a sufficient understanding of what they are up to. Sir, what they have achieved is only to kick the crisis can forward and upwards. Let us pray it will not roll back too hard on us, our children or our grandchildren.

Sir, to be sincere, I do believe that FT’ team, with its silence, has lost any right it could have to throw first stones in the matter of who are suited or not to man the Fed, or any other central bank for that matter.

You argue: “The merest hint that Mr Powell is doing Mr Trump’s bidding is enough to corrode the Fed’s independence.” Sir, for the umpteenth time, when the Fed and other central banks, in 1988, Basel I, approved of risk weighted capital requirements for banks that assigned a risk weight of 0% to the sovereign and 100% to the citizens, they went statists and gave up their independence.

In truth they did exactly what a Hugo Chavez or a Nicolas Maduro would want a Venezuelan central banker to do, namely to be act under the presumption that any bank credit to the government is managed better than a credit to the private sector.

Look back three decades; have you seen any president anywhere who objects to such a Sovereign Debt Privilege?

Greece, a Eurozone nation that takes on debt in a currency that is de facto not its domestic printable one, was even more crazily assigned a 0% risk weight, and ECB knew about it, and kept silence on it. I do not remember you thinking ECB’s bankers as inept.

@PerKurowski

Should we prohibit divergent perceptions of credit risk? No and yes!

Sir, Martin Wolf writes: “In a recent paper, Marcello Minenna of Con-sob (Italy’s securities regulator) argues that divergent perceptions of credit risk across member states reinforce divergent competitiveness in goods and services. This puts businesses in peripheral countries at a persistent disadvantage, which becomes worse in times of stress.” “The ECB must reconsider its plan to tighten” March 6.

So should we prohibit divergent perceptions of credit risk? No and Yes!

Absolutely no! The existence of divergent perceptions of credit risk is crucial for an effective allocation of credit.

Absolutely yes! Bank capital requirements based on divergent perceptions of credit risk guarantees an inefficient allocation of credit.

The truth is that businesses in peripheral countries are less at disadvantage for their countries being perceived risky, than for the regulators, or other authorities, considering that there are others much safer. The risk weight for the Italian sovereign, courtesy of the EU authorities is 0%, while the risk weight of an Italian unrated entrepreneur is 100%. Need I say more?

Wolf opines, “The painful truth is that the eurozone is very close to the danger zone [as] the spectres of sovereign default and ‘redenomination risk’ — that is, a break-up of the eurozone — may re-emerge”. Indeed, and the prime explanation for that is precisely the 0% risk weights assigned to its sovereigns, those de facto indebted in a currency that is not denominated in a domestic (printable) currency.

We’ve just celebrated the 20thanniversary of the Euro. The challenges its adoption posed were well known. What has EU done to really help confront those challenges? Very little to nothing! In truth, with its Sovereign Debt Privileges, they have managed to make it all so much only worse. Sir, considering that, for someone who truly wanted and wants the EU to succeed, it is truly nauseating to see the daily self-promoting tweets from the European Commission.

@PerKurowski

More than between left and right, the division is between tax paying citizens and witting or unwitting possible redistribution profiteers

Sir, Wolfgang Münchau writes, “Liberal democracy is in decline for a reason. Liberal regimes have proved incapable, of solving problems that arose directly from liberal policies like tax cuts, fiscal consolidation and deregulation: persistent financial instability and its economic consequences” “The future belongs to the left, not the right” February 25.

The risk weighted capital requirements placed on top of any natural risk aversion distorts the allocation of bank credit in favor of what is perceived as safe and against what’s perceived as risky, has nothing to do with liberal policies. The risk weights of 0% the sovereign and 100% the citizens, just puts crony statism on steroids.

Münchau also “The euro, too, was a liberal fair-weather construction.” That could be but when EU authorities assigned a 0% risk weight to all public debt of eurozone sovereigns, denominated in a currency that is not their domestic (printable) one no one could call that a liberal construction. It was idiotically dooming the euro to failure.

Sir, I feel left or right labels do not really define what we citizen are up against. Our real adversaries are those I have come to call redistribution profiteers. In my home land Venezuela, where the central governments some years has received 97% of all export revenues, that is easy to see. But even in the rest of the world that is happening, unfortunately without being sufficiently understood. Much of it is the result of citizens lacking the most basic societal information, namely how much their central and local government receive in income, from all taxes, per citizen. 

Of course taxes are needed but such per citizen data, published regularly, would also put pressure on improving the day-to-day quality of government bureaucracy. I mean we want our taxes to be spent well. Don’t we?

PS. As a self declared radical of the middle, or extremist of the center, I feel the best hope we now have to improve our societies is by means of an unconditional universal basic income. That UBI should be 100% paid for, be large enough to help all reach up to jobs in the real economy and be small enough so as not allow anyone to stay in bed.

@PerKurowski

What good is it to celebrate the euro’s first 20 years if, as is, it won’t make the next 20?

Sir I refer to Martin Wolf’s “Marking the euro at 20: the eurozone is doomed to succeed” January 16.

November 1998 in an Op-Ed titled “Burning the Bridges in Europe” I wrote: 

“As participants in a globalized world in which Europe has an important role, we must naturally wish all members luck, no matter what worries we might secretly harbor.

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, 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.

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.”

Sir, twenty years later those observations are still valid, and way too little has been done to solve the challenges.

Now add to that the fact that even though Eurozone sovereigns take on debt in a currency not denominated in their own domestic printable one, EU authorities have assigned a risk weight of 0% to all of them. That all points to that it will end badly.

So Sir, though Martin Wolf raises many more or less valid alerts and gives some recommendations worth heeding, he should also be thinking about how to get the euro out from that “0% risk” death-trap corner into which it has been painted.

@PerKurowski

Worse than Italy “sleepwalking into instability” is the European Commission pushing the Eurozone into it fully awake.

Sir, Jim Brunsden and Miles Johnson writes the European Commission stepped up action on Italy’s rule-busting 2019 budget, warning that its plans to stimulate the economy through increased borrowing, risks “sleepwalking into instability”. “Brussels warns Italy’s budget threatens ‘instability’” November 22.

Of course, as Pierre Moscovici, EU economy commissioner, says: “this budget carries risks for Italy’s economy, for its companies, for its savers and its taxpayers”.

The sad fact though is that reaching an acceptable agreement on the budget issue would still be like papering over Italy’s and EU’s real underlying problems, not solving much.

The European Commission must/should know: 

1. About the challenges the Euro imposed on Eurozone members and that it has, for soon twenty years now, done nothing to resolve. 

2. That, for purposes of bank capital requirements, assigning a 0% risk to all sovereign borrowers within the Eurozone, those who de facto have their debt not denominated in a domestic (printable) currency, is a regulatory subsidy that impedes markets to signal the real costs of sovereign debt; which will necessarily cause many of its members to incur in dangerous excessive levels of public debt.

Before EC face up to these issues and does something real and sustainable about it, though much mightier, it has still not earned much right to lecture Italy.

Just like all regulators and central bankers, believing that what bankers perceive as risky is more dangerous to our bank systems than what bankers perceive as safe, have no right to lecture us on risk management.

EU can’t keep forcing its members to walk the plank, as it did with Greece, and still remain a viable union. Anyone against a Brexit and for a Remain should be very aware of that… that is unless his position has nothing to do with EU and all to do with local politicking.

@PerKurowski

Italy’s problems are not all of its own making; much is caused by a regulatory mistake committed by bank regulators and the European Commission.

Sir, Franco Debenedettiwrites “The flexibility accorded by Brussels was used neither for reducing the debt, nor for implementing the ‘painful structural reforms to promote growth’ [and] The budget actually under examination by Brussels is all about more public expenditure employed for giveaways and does nothing to improve productivity and growth of the country, “A bargain with Brussels looks unrealistic”, November 19.

He is correct, in that, but he leaves out a crucial element that is an essential part of current realities.

Basel II, approved in June 2004, held that banks as Italy was rated at that time, AA-, needed to hold 1.6% in capital against Italy’s sovereign debt. Currently rated BBB, banks were supposed to hold 4% in capital against that debt. But the European Commission then surpassed those per se already extremely generous and pro statist capital requirements. Through “Sovereign Debt Privileges” it assigned a 0% risk weight on Italy’s sovereign debt; which meant banks did not need to hold any capital against it.

That allowed (or in reality forced) Italy’s banks to end up with a huge overexposure to Italian sovereign debt in Euros, a debt that de facto is not denominated in Italy’s domestic (printable) currency.

What to do? Any solution is going to hurt, but one has at least the right to ask whether Italy, as was Greece, should have to carry the whole costs of a mistake committed by the European Union authorities.

To top it up, there is no way one can improve productivity and growth of any country that distorts the allocation of bank credit to the real economy, as do the risk weighted capital requirements for banks.

@PerKurowski

In a “world full of uncertainties”, how come regulators are allowed to bet our banks on the certainty of perceived risks?

Claire Jones reports that Olli Rehn, a possible contender to replace Mario Draghi opines that Central bankers must have “the ability and agility to manoeuvre though the current world that’s full of uncertainties” “Central bankers face a ‘world full of uncertainties’” November 19.

This is exactly what is wrong, they do accept there are uncertainties all around, but then they are not capable to utter a word when regulators, with Basel II, bet the banks on certainty, by allowing banks to leverage 62.5 times their capital with an asset if only a human fallible credit rating agency had assigned it an AAA to AA rating. 

According to Jones, Rhen agrees with Draghi in that “if Italy wanted ECB help, it had to sign up to a bailout programme from the European Stability Mechanism”. That de facto means that Italy must have to walk the plank as Greece did. 

But, I see not a word about the European Commission “Sovereign Debt Privileges”, that which set a 0% risk weight on Italy’s Euro denominated public debt, that which allowed (or in reality forced) Italy’s banks to overload on that debt. Why should Italy (or Greece), in a Union, have to carry the whole costs of a mistake caused by the Union?

Rhen opines “The only legitimate way of making monetary policy, be it conventional or unconventional, is to look at the economic development in the euro area . . . in its entirety”. He is absolutely right, but then the question is, why have EU not done anything real, in 20 years, to solve the challenges posed by the Euro to the individual nations of that entirety?

Those challenges if not solved, soon, pose a real existential threat to the European Union. Does Olli Rhen really believe that completing a banking union would suffice to take care of that?

@PerKurowski

Poor Italy! So squeezed between inept Brussels’ technocrats and their own redistribution profiteers.

Sir, I read Miles Johnson’s and Davide Ghiglione’s  “Italy’s welfare gamble angers Brussels and worries business” November 10, and I cannot but think “Poor Italy”, squeezed between inept Brussels’ technocrats and redistribution profiteers.

“Italy’s welfare gamble”? That welfare which Brussels’ technocrats, for the purpose of bank capital requirements have with their Sovereign Debt Privileges of a 0% risk weight helped finance? Italy’s public debt is now about €2.450 billion, meaning over €40.000 per citizen? 

That 0% risk weight is alive and kicking even though Moody’s recently downgraded Italy's debt to “Baa3”, one notch above junk status and that even though it might not have yet considered that the euro is de facto not a real domestic (printable) currency for Italy. If that is not a welfare gamble by statist regulators on governments being able to deliver more than the private sector, what is? Poor Italy.

But then I read about a government proposal that could increase welfare payments to poor and unemployed Italians to as much as €780 a month but which eligibility and distribution criteria remain unclear and again I shiver. That sounds just as one more of those conditional plans redistribution profiteers love to invent in order to increase the value of their franchise. Poor Italy. 

For me a way out that would leave hope for the younger generation of Italians would have to include a restructuring of their public debt with a big haircut for their creditors; hand in hand with an unconditional universal basic income, that starts low, perhaps €100 a month, so as to have a chance to be fiscally sustainable.

And if that does not help, then Italy will have to count (again… as usual) on its inventive and forceful strictly citizen based “economia sommersa”, something that is not that bad an option either.

PS. Oops! I just forgot that most of that Italy debt is held by Italian banks, so perhaps a type of Brady bonds EU version could be used. Like Italy issuing €2.4 trillion in 40 years zero-coupon debt, getting an ECB guarantee for a substantial percentage of its face value, and allowing banks in Europe to hold these on book on face value; all so that Italy can use it to pay off its creditors could be a shooting from the hip alternative… and then of course have all pray for some inflation to reduce the value of that debt.

PS. I am not the one first speaking about Nicholas Brady, then US Treasury Secretary, approach in 1989. Here is William R. Rhodes “Time to end the eurozone’s ad hoc fixes” in FT November 2012.

@PerKurowski

EU, when imposing armistice conditions on your capitulating eurozone sovereign debtors, remember the Versailles Treaty.

Sir, Simon Kuper referring to historical events like the Versailles Treaty writes, “In international relations, treat even your opponents like long-term business partners. You will meet again, and if you hurt them for short-term gain, they won’t forget.” “Lessons from 1918 for today’s world leaders”, November 3.

And Kuper follows it up with, “Peace in the region cannot remain the EU’s selling point. Precisely because Europeans have come to take peace for granted, they now (rightly) ask: ‘What have you done for me lately?’ ”

Sir, if I were a Greek citizen, and perhaps this would soon apply to an Italian too, I would ask and tell the European Union authorities, the European Commission, the following: 

“Why on earth did you assign our sovereign, who you must know that in terms of fiscal sustainability and efficient governing is not the brightest star by far, an absolute zero percent credit risk? That allowed banks all over Europe to lend to our sovereign against no capital at all, something that caused our sovereign to get hold of more and more easy money… until it could no more.

But besides this, what I really want to know is: Even though you have provided some cash flow easing, which helps of course, as it was partly or even mostly your fault, why did you force on us Greeks all that debt and did not ask European banks to share more in the losses? Thanks much to your mistake and your armistice terms, we are now saddled with about €345.000 million of debt, more than €30.000 million for each Greek, and it is all denominated in a currency which de facto is not entirely our domestic currency.

Do you think that newborn Greeks, when they grow up and find out, are going to keep a cool head about all this and be able to sing the EU’s anthem “Ode to Joy” with enthusiasm?”

Sir, in short European “world leaders gathering in Paris next week to commemorate 1918” should reflect on what they might be doing today when imposing unrealistic armistice conditions on those who have to capitulate on not being able to service their sovereign debt.

PS. Sir, as a Venezuelan I can assure you that those looking to bailout those of theirs financial profiteers who provided finance to our corrupt human right’s violating regime, will not find us Venezuelans accepting that without a fight.

@PerKurowski