For Europe to reduce the horrors of its house of debt, it needs to allow its risky-risk-takers to get going.

Sir, Wolfgang Münchau writes about a “balance sheet recession: the notion that indebted households and corporations do not care about cheap interest rates but just want to offload debt. When that happens monetary policy becomes ineffective” and then, salt on the wound, he quotes Moritz Kramer of Standards & Poor’s saying “The Europeans have barely begun to deleverage”, “Europe faces the horrors of its own house of debt” June 16.

Has Münchau ever heard that “when the going gets tough the tough get going”? If so I would ask him who he thinks might be the real tough in Europe. And I would advance that would be all those with a spirit of initiative who are willing to risk either their good name or whatever little capital they have, in order to take on a business venture.

And, if you agree, then reflect on that these are precisely those who are now locked out from having a fair access to bank credit by the sissy bank regulators and their risk-weighted capital requirements.

And so, if Europe is going to have a chance to reduce “the horrors of its own house of debt”, it must start by inducing banks to allow the risky-risk-takers of Europe, wherever you can find them, to get going. 

Given the real and urgent needs of Europe, the risk-weight on loans to “risky” medium and small businesses, entrepreneurs and start-ups, should be lower than that of their “infallible sovereigns.”

Regulators, stop the credit rating agencies from telling banks where it is safe to go. They haven’t a clue, as neither have you

Sir, Christopher Thompson quotes Bridget Gandy, managing director of Fitch “If you compel banks only to use a leverage ratio, the only way to be more profitable is to take more risks on the assets you have. You need to have balance between capital coverage of risk-weighted assets and leverage, risk is not just about size”, “Banks ‘need’ to cut €3.2tn of assets” August 12.

And that is precisely the type of mentality, which completely aligned with the mentality of the bank regulators in the Basel Committee, and which if allowed to prevail would guarantee that the €3.2tn of assets expected to be cut in Europe, would not be cut in the most economic efficient way, but only in accordance to its perceived riskiness.

And, as a direct consequence, Europe would end up with its banks stuffed with “absolutely safe” assets, which could be financed by other means, while it’s medium and small businesses, entrepreneurs and start-ups, those “risky” borrowers which might hold the best chances for Europe to return to sturdy economic growth, will be completely starved for access to bank credit.

A credit rating agency, incapable of looking around the corner to what might happen down the line, might be an extremely good agency for rating the creditworthiness of banks and borrowers this and the next quarter, but is extremely useless for rating the credit worthiness of anything some years ahead.

“The only way [for banks] to be more profitable is to take more risks on the assets you have” Yes Fitch, indeed… and what is wrong with that? The latest decades the way banks have become more profitable has only been by convincing the regulators they need to hold less and less capital on assets perceived as absolutely safe. And look what damages that has caused us.

No Fitch! I appreciate very much your credit ratings, and these will be used, but it is high time for regulators to stop you from telling the banks where it is safe to go, because, sincerely, you have not the faintest idea about it... as of course, neither have they.

What European banks need is not to de-leverage but more capital, lots of it

Sir, Christopher Thompson reports on a Royal Bank of Scotland analysis that states “Banks need ‘to shrink’ balance sheets, to shrink their balance sheets dramatically to ensure that the continent could withstand another financial crisis… But as European banks deleverage, such as by selling loan books, there are knock-on effects to the real economy… It’s a catch-22”, July 22.

Forget it! What Europe's real economy and European banks need is more bank capital, lots of it.

There is no fiscal or monetary policy that can make up for bad and distortive bank regulations

Sir, Gillian Tett draws four quadrants by on one axis showing the private sector in a credit boom, and the public sector stimulating, and on the other axis the private sector deleveraging and the public sector also deleveraging, going for austerity, trying to rein in any inflation threats. 

And this tool makes it easy to understand that it is only in the quadrant where both the private sector and the public sector are deleveraging that the risk of a liquidity trap and deflation exists, and so, when there both “monetary policy and fiscal expansion must be stimulative, since loose money alone will not work”. And this Ms Tett does in “It’s time to embrace a new mental map of central banks” January 11.

Absolutely! But using the same methodology, and in this case including on one axis what is ex-ante perceived as absolutely safe, and what is perceived as risky, and on the other axis what ex-post turns out to be safe, and what turns out to be risky, one should also be able to understand that it is only the quadrant containing what was ex-ante perceived as absolutely safe and that ex-post turned out to be risky, that poses any major threat to the banks. 

And therefore one could conclude in that capital requirements for banks like the current ones, higher for what is perceived as risky and lower for what is perceived as absolutely safe, make no sense whatsoever and only distorts.

And so again, for the umpteenth time, let me repeat that it really doesn’t matter if you select the absolute correct fiscal and monetary policy if at the same time, by using loony and distortive bank regulations, you are going to impede these to work.

Who placed and keep the banks on a eurozone knife-edge?

Sir, part of the problems with banks is that those same regulators who should have required equity from the banks when these placed sovereign loans on their books, but did not, because the regulators wished to consider these sovereigns as infallible, are now dumb enough to require the banks to immediately adjust to the fact that the sovereigns might not be so infallible after all. In other words, the banks are forced to deleverage, which hits of course the most those who require the most of bank equity, namely the officially decreed as risky, namely the small businesses and entrepreneurs, namely those least responsible for this crisis. 

In a period where countercyclical action is required, new bank equity should be raised to support new lending and not to cover capital requirements for old bad lending. But, even though Martin Wolf now begins to admit the need “to break the adverse loop between subpar growth, deteriorating fiscal positions, increasing recapitalization needs, and deleveraging”, he still refuses to do a full Monty disclosing the regulatory stupidity, probably because he does not want hurt his buddies, “Banks are on a eurozone knife-edge” April 25. 

Of course, it also reflects the fact that Martin Wolf, the chief economics commentator at FT, from an ideological point of view, much rather prefers government bureaucrats to run the Keynesian deficit spending he favors, than allowing the banks to allocate those resources without the interference of regulating bureaucrats. 

Yes banks are indeed on a eurozone knife-edge, but we surely need to look more into who placed them there and who keeps them there?

The “risky” are the European untouchables.

Sir, John Plender is absolutely correct when he identifies the officially “risky”, the emerging economies of eastern Europe and small and medium sized businesses, already penalized by the Basel capital regime, as the biggest victims of the ongoing deleverage, “Europe faces vicious circle of disorderly bank deleveraging” April 25. 

The World Bank and the IMF during their recent spring meetings were all dressed up in signs that asked about “reducing gaps”. And indeed, one gap that surely needs to be closed, and where the World Bank and the IMF should be at the forefront, is the one odiously increased by senseless bank regulators, between those perceived ex-ante as “not-risky” and those similarly perceived as “risky”. 

Unfortunately no one made a big point of this during these spring meetings as they were all busy talking about the scarcity and the need of “safe-assets”. Clearly, those perceived by the regulators ex ante as “risky”, in Europe, are a new class of untouchables.

Deleveraging is so much harder on those officially deemed as risky

Sir, in a world of capital requirements for banks based on perceived risks, the banks achieve the most deleveraging by getting rid of what is officially perceived as risky. For instance for every 100 a bank currently drops of triple-A rated assets it will only free about 1.6 in equity, compared to the 8 in equity it manages to free up by dropping 100 of loans to small businesses and entrepreneurs. 

That regulatory discrimination, based on perceived risks, is absolutely indefensible since markets and banks have already cleared for that by means of interest rates, amounts at exposure and other terms. 

It is truly sad to read Martin Wolf´s “A hard slog in the foothills of debt” March 14, as well as the quoted Mc Kinsey report “Debt and deleveraging”, January 2012, completely ignoring the regulatory discrimination against those officially deemed risky, which was already present when leveraging, but is also now, by far, the ugliest facet of deleveraging.

We need a new morning, before darkness sets in!

Sir Gillian Tett holds that “Deleveraging out of the debt mire will be an unsavoury task” January 15 mostly because “it remains a very open bet whether western voters will accept austerity without a backlash”.

Good for her, that kind of opinions are exactly those needed in order to start to prepare a debt resolution plan that makes sense for future generations... since what least makes sense is to hang on to something unsustainable just because that is the right thing to do. Anyone proposing the "hang on and let’s work it out" route should first establish how much of a tax on his wealth he is willing to contribute for such a dignified purpose.

The value of a clear morning no matter the storm during the night should not be underestimated. I would prefer my children to work for their tomorrows than to pay for our yesterdays. And if the young find some resources to take care of us baby-boomers then that would be a much welcomed and appreciated bonus.