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

Regulators forced banks into what’s perceived safe, thereby forcing the usually most risk adverse into what’s perceived risky.

Sir, Robin Wigglesworth writes “Many investors such as pension funds and insurers [are] pushed towards the only other option: venturing into the riskier corners of the bond market, such as fragile countries, heavily indebted companies and exotic, financially engineered instruments. These are securities they would normally shun — or at least demand a much higher return to buy.” “Negative yields force investors to snap up riskier debt” August 16.

As an example he mentions “Victoria a UK-based company that issued a €330m five-year bond that drew more than €1bn of orders [because] the relatively high 5.25 per cent yield it offered, helped investors swallow misgivings over its leverage.”

Clearly liquidity injections, like central banks’ huge QEs, has helped to move interest rates much lower everywhere, but, as I see it, much, or perhaps most of what Wigglesworth refers to is the direct consequence of the risk weighted capital requirements for banks.

That regulations allowed banks to leverage much more their capital with what’s perceived (decreed or concocted) as safe, than with what’s perceived as risky, which meant that banks can more easily obtain higher risk adjusted returns on equity with the safe than with the risky… and those incentives were as effective as ordering the banks what to do. That made banks substitute their savvy loan officers, precisely those who would be evaluating and lending to a Victoria, with equity minimizing financial engineers.

As a result the interest rates charged to the safe… little by little forced those who did not posses savvy loan officers to take up the role of banks.

Will it stop there? Not necessarily. Banks, and their regulators, are now slowly waking up to the fact that the margins that the regulation benefited “safes” offer, are not enough for banks to survive as banks. 

But how to get out of that mess will not be easy. Solely as an example, when in 1988 bank regulators assigned America’s public debt a 0.00% risk weight, its debt was about $2.6 trillion, now it is around $22 trillion and still has a 0.00% risk weight. How do you believe markets would react if it increased to 0.01%? 

@PerKurowski

If central banks offered “unimpeachably safe liquid assets” to all, how much negative interests would these pay?

Sir, George Hatjoullis writes: “Only the central bank can provide unimpeachably safe liquid assets…[so] allow individuals and corporate entities to hold deposit accounts with the central bank… The banking system would be free to pursue its risky credit provision role and individual entities would have their safe liquid haven”, “Allow deposit accounts within central banks” September 25.

That is based on two false premises. The first one is that central banks really are riskless. Though they can always print money, there’s no guarantee they won’t print too much money, and therefore repay with money worth less.

The other is that you could provide some with “unimpeachably safe liquid assets… a safe liquid haven” at no costs. The opportunity cost of that, is not sharing into the benefits of risk taking.

When it comes down to risk management I always start by asking: “What risk is it that you can least afford not to take?” That is because the worst certainty comes hand in hand with the avoidance of all risks.

Sir, to allow some to have access to unimpeachably safe liquid assets, while others take the risks, just guarantees putting inequality on steroids. The society should not do that! An adequate bank system allows everyone to share, at least ever so slightly; in the risk-taking the society needs to move forward.

@PerKurowski

If government monopoly profiteers de-cash society, in order to impose negative interests, is that not also a crime?

Sir, Kenneth Rogoff writes:“[In] advanced economies, the idea of recalibrating the use of cash is an entirely reasonable one. While paper currency has many virtues that will continue into the distant future (including privacy…) the vast bulk is held in large denomination notes such as the US $100 and the €500 that have little significance in most retail transactions. A broad array of evidence suggests that high-denomination notes… mainly serve to facilitate tax evasion and crime.” “India’s cash bonfire is too much, too soon” December 10.

I have two questions: 

First: Is not the US $100 and the €500 the most effective tools for privacy?

Second: Is not cash, one of the last resources you could use to defend yourself against negative interests?

In future presidential electoral debates anywhere, a citizens obligatory question could be: "Sir, do you want to screw us getting rid of cash, so as to make it easier for you to pay off government debts with negative interests?"

@PerKurowski

Who is able to measure how much risk weighted capital requirements for banks distort the real economy?

Sir, Gillian Tett quotes Axel Weber, former head of the Bundesbank, now chairman of UBS with “I don’t think a single trader can tell you what the appropriate price of an asset he buys is, if you take out all this central bank intervention” “Investors are ill equipped for our unfathomable future” October 14.

And much less can anyone know what the appropriate price of an asset he buys is, if you take out all the distortions the risk weighting of the capital requirements for banks produce. Just look at houses. How could anyone believe their prices would be the same as now, if bankers were required to hold as much capital when financing houses than when financing SMEs and entrepreneurs?

Sovereigns being risk weighted at 0%, while We the People at 100%, is one of the strongest statist statements ever, and it has been allowed to go unnoticed for way too long.

With central bankers’ QEs there is at least some transparency… but I guess Sir that, with respect to negative interests, no one knows either how to really measure their impact… it does really seem to be a huge leap of faith into the unknown.

@PerKurowski ©

Not only criminals and tax-evaders, but also ordinary people can be against restrictions on cash.

Sir, referring to how the existence of cash creates difficulties for central banks imposing negative interests. you mention “economist Kenneth Rogoff, one of the… restrictions on the use of cash noted proponents, is still receiving death threats for raising the idea. “The growing challenge to central banks’ credibility” September 24.

Frankly, that phrases it as only assassins and bad people would be for blocking the idea of restricting cash. I am sure that non-violent, non-criminal, not-tax evading ordinary people can also find the restriction of cash very problematic.

Just as an example, if governments mistreat cash, with inflation, they mistreat all holders of it equally, but if there was no cash and all monetary assets and their movements were identifiable, they could be very selective in who they want to mistreat or not.

Does this mean in any way or form that I condone the bad uses of cash? Of course not, that would be worse than silly.

PS. Central banks that only want banks to harvest what’s “safe” and not sow what’s “risky”, do not deserve any credibility. 

@PerKurowski ©

Central banks that only want banks to harvest what’s “safe” and not sow what’s “risky”, do not deserve any credibility

Sir, you write “central banks have resorted to ever more ingenious methods to convince a sceptical public that they still have the ability to create inflation”, “The growing challenge to central banks’ credibility” September 24.

Excepting those loving the current inflation in the values of assets, what sceptical public do you identify as wanting the core goal of central banks to be achieving higher inflation?

And as for their tools to obtain that “core goal” you mention the failures of QEs and low interest rates, and seemingly want them to dig deeper into negative interest rate territory.

No Sir! Any central banker that does not speak out against the risk weighted capital requirements for banks, that which have banks only refinancing the safer past and not financing the riskier future, do not deserve any credibility. Moreover they should be publicly shamed.

PS. Not only criminals and tax-evaders, but also ordinary people can beagainst restrictions on cash

@PerKurowski ©

Truth is that all in the Fed behave less like doves, and much more like statist hawks

Sir, Sam Fleming writes: Federal Reserve once again held short-term interest rates unchanged… a victory for doves… Even if they concede a quarter-point increase by the end of the year, it will leave the Fed on track for the shallowest rate-lifting cycle in modern times”. “Doves ascendant in Yellen’s Federal Reserve” September 23.

The effects of keeping those interest rates down, when combined with the QEs, and when combined with the regulatory subsidies implicit in the 0% risk weighting of the sovereign, goes primarily and in large scale to the government. In that respect I am not sure we should talk about Fed doves, they all qualify more as statist hawks.

@PerKurowski ©

​

While central bankers ponder moving their targets, we should ponder the need of moving them out.

Sir, I refer to your “Central bankers ponder moving the goalposts” August 26.

Stock and bond markets are important but the banks are most often the financiers of the first stages of growth. So while regulators, with their risk weighted capital requirements, insist in distorting the allocation of bank credit to the real economy; impeding sufficient flows to what has been deemed as risky, like SMEs and entrepreneurs, there is no chance in hell that QEs, negative interests or whatever else central bankers might concoct will work.

Some want to make up for the regulatory risk aversion by designing special financing facilities, for instance to SMEs. That’s would be the wrong way, that would just make everything more complicated and even less transparent.

Frankly, when I read about what options central bankers are pondering, it all sounds like a Lilliput and Blefuscus debate, 2% or 4%, break the egg on the larger or on the smaller end. Perhaps, if they cannot get their act together, and before they take us further up the huge mountain of debts they talk down as quasi-debts, we should seriously ponder the need to move them out. 

Inflation targets, nominal value of GDP and such, means little for most on Main Street. For instance, as a grandfather, I would welcome some central bankers that would target future employment rates, in decent jobs of course; and were willing to index their respective retirement plans to my grandchildren’s success, and to the value of the pension and retirement plans of those of their generation.

Sir, the independence of central bankers, cannot signify they are not to be held accountable for what they do.

@PerKurowski ©

Regulators divided private sector in two, Safe and Risky. And guess who is losing out more than usual? All of us!

Sir, Bill Gross asks: “Why would the private sector… not borrow at practically no cost to invest in a centuries’ old capitalistic model proven to reward risk-taking in the real economy?”, “Central bankers are threatening the engine of the economy”, August 18.

 

In his comments Gross forgets there are now two private sectors. One, perceived, decreed or concocted as “safe”, AAArisktocracy and residential housing, and to whom banks can lend against very little capital; and the one which includes those perceived as risky, SMEs and entrepreneurs, those that regulators require the banks to hold much more capital when lending to.

And so “The Safe”, by allowing banks to leverage more their equity, provides the banks with higher expected risk adjusted return than what “The Risky” can do,

And so regulators decreed that money paid in net risk adjusted margins by “The Safe”, is worth more to banks than that same money when paid by “The Risky.

And so The Risky have been left out in the cold, that is unless they accept to compensate banks for this regulatory discrimination; by paying rates over what their ordinary risk adjustments would justify.

QEs and other fiscal stimuli, or negative interests, finds it hard to overcome this hurdle and reach with bank credit the vital SMEs and entrepreneurs, who might want to borrow, and so most of it gets wasted.

And besides The Risky, we all lose out! It refuses the risk-taking tomorrow’s economy requires be taken by todays’; and all for nothing, because The Risky never cause that type of excessive bank exposures that can cause a major crisis; that dishonor belongs entirely to “The Safe”. 

@PerKurowski ©

Are you shocked seeing the Financial Times report on banks not doing anything but storing cash, and want to help?

Sir, I refer to your front-page “Big bills: Plans to hoard banknotes pose tricky problem over storage”; and Claire Jones’ and James Shotter’s “Note of caution as Europe’s banks seek to stockpile cash” August 17.

It is shocking; we all know that is not how it should be. That is money not earning what it needs to accumulate in order to pay pensions for the older of tomorrow. That is money not invested in creating the jobs of tomorrow for the young.

Just like John A Shedd said: “A ship in harbor is safe, but that is not what ships are for.”, “Money held by banks in their safes is safe (sort of) but that is not what banks are for”

Do you want to help change that? Then please support the discussion of the following:

Until banks have 8 percent in capital against absolutely all assets, including cash and including loans to infallible sovereigns, the banks should not be allowed to repurchase their own shares, or to pay out more than 20% of their net after tax profits in dividends.

With that I guarantee you some real action in banks lending to the real economy; and that could lead to real economic recovery, real possibilities to build up pension funds, and real jobs for our children and grandchildren.

Forget about QEs, fiscal stimulus and negative interest rates; and let “risky” SMEs and entrepreneurs get the credits to have a go at it.

@PerKurowski ©

If one incorrectly accuses bank regulators of being totally inept, in public, one would think they would answer

Sir, Eric Lonergan writes: “Mark Carney is right: the traditional use of interest rates has run its course. For central banks to continue playing a role in preventing recession and raising growth, they will need to rethink the entire premise of monetary policy and aim their firepower directly at consumer spending and corporate investment”, “Interest rates are a spent economic force” August 13.

What central banks, and regulators, must really rethink is the whole bank regulatory framework’s pillar; the risk weighted capital requirements for banks. The problem is they are doing their utmost to avoid that Pandora box to be opened, because they know that would disclose their incredible technocratic-besserwisser disabilities.

Sir, you know what I think of these regulations, and you might think I am obsessed with the issue, which I am… but have you never asked yourself why my arguments are not even discussed? I have publicly accused Mark Carney, Mario Draghi, Stefan Ingves and many other of being absolutely inept bank regulators… and, if I was wrong, one could reasonably assume they would love to strongly correct me… in public.

PS. Sir, as you might be fed up receiving my many letters, you could also ask the regulators to answer my questions, and then you might get rid of me for good. Do you dare!

@PerKurowski ©

Only by getting rid of all regulatory subsidies to negative rate yielding debt, would we have free-market real rates

Sir, I refer to Gillian Tett’s discussion of “The bizarre world of negative rates”, August 12. As Ms. Tett does not refer to the obvious distortions in the allocation of credit to the real economy risk weighted capital requirements for banks and other regulations cause, I can only assume she is following some standing instruction of not to do so.

Because she must know that, if a bank wanted to “move funds from low-yielding assets, such as [sovereign or highly rated private] bonds or cash, into more productive investments that could produce better returns and growth”, then it is required to hold more of that equity that expects high returns, or then it can pay out less dividends... or bonuses.

And it will get even worse, since statism imposed via regulations is rampant. Only yesterday Robin Wigglesworth in Short View wrote: “New rules slapped on the US money market fund industry… are set to come fully into effect in October. The changes have spurred a gradual investor exodus from the funds, and the conversion of ‘prime’ MMFs which invest into corporate debt into ones that invest only in Treasuries (which are less affected by the new regulations).”

@PerKurowski ©

Monetary and fiscal policies, even though they live at different addresses, are very much married

Sir, you write “there are a few welcome signs that fiscal rather than monetary policy may finally be taking some of the strain of stimulating a sluggish global economy” and, again, that “With bond yields apparently grinding ever lower in advanced economies, the cost of a debt-financed expansion continues to fall.” "A quiet shift in focus for economic policymakers", August 6.

And one gets the impression you believe monetary and fiscal policies are independent, and live separates lives. That’s really not so, they are much married even if they don’t live at the same address.

They were very much married back in 1988 when regulators (central banks) with Basel I assigned the sovereign a risk weight of 0% while giving us We-The-People one of 100%.

In November 2004, in a letter published by the FT I wrote: “Our bank supervisors in Basel [central banks] are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector [sovereigns]?”

And here follows a brief storyline I recently gave you in another of the letters you feel to have the right to ignore, only because they verse repeatedly on the same theme.

Government issues bonds, the public buys these, and central banks, wanting the economy to grow, then buy these from the public by means of QEs

Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.

And so then you and many others recommend to take advantage of these low borrowing rates, in order for governments to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.

But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then (cheered on by FT) launch new rounds of QEs, and buy more government bonds from the public… and on and on it goes… until!

Sir, at what point do negative rates become absolutely incompatible with a 0% risk weight of sovereign debt? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?

And to top it up, meanwhile, SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, if these want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge them much higher interest rates, making thereby the “risky” riskier.

How the hell did we land in this hole? I know!

PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?

@PerKurowski ©

At what point do negative rates on government debt become absolutely incompatible with its zero % risk weight?

Sir, in reference to Dan McCrum’s “Fire up the printing presses for a useful jolt to the economy” August 5, this is what I have to say.

Government issues bonds, the public buy these, and central banks, wanting the economy to grow, then buy these from the public.

Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.

And so then Martin Wolf and other recommend the government to take advantage of these low rates, in order to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.

But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then buy more government bonds from the public… and on and on it goes.

And, to top it up, banks and insurance companies are told by their regulators: “If you do not buy 0% risk-weighted government bonds, then you have to cough up with more equity”. And so banks (and insurance companies and alike) buy more government bonds, and the rates on these keep falling and falling… where does it end?

At what point do negative rates become absolutely incompatible with a 0% risk weight? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?

And to top it up, meanwhile, if SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge higher interest rates, making the “risky” riskier.

How the hell did we land in this hole? I know!

PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?

@PerKurowski ©

Basel Accord’s risk weights subsidized sovereign bonds, so since then these were no longer proxies for risk free rates

Sir, Michala Marcusssen argues that because of quantitative easing and negative interests “the proxies of sovereign bond yields for the “risk-free” rate of return is becoming an increasingly imperfect substitute with potentially dangerous consequences” “The demise of the ‘risk-free’ rate in markets”, June 14.

Marcussen refers to “a new debate on how to treat sovereign debt on bank balance sheets. At present, sovereign debt enjoys favourable treatment not just in the euro area but across the globe. Basel III allows (but does not mandate) a capital requirement of 0 per cent for sovereign bonds”

Not exactly, as I have often written to FT, the problem of a not valid proxy for the risk-free rate originated much earlier, soon 30 years ago.

The Basel Accord of 1988, Basel I, set the risk weights for sovereigns at zero percent and that of citizens at 100 percent. Since that signified a regulatory subsidy of sovereign debt, ever since we have not have had a reasonable proxy for a risk free rate.

The best pension security you can get is to have grandchildren who love you and who work in a not too bad economy.

Sir, John Plender valiantly discusses one of the most difficult and delicate current problems, namely if tomorrows pensioners will even come close to collect on their expectations, “Uncertainty clouds the outlook for pension funds” May 16.

And looking at the problem solely from the perspective of the current manipulated low rates he already concludes: “What we can safely posit is that an exit from the low or negative rates that cause the blight, however desirable for the pensions system, is unlikely to be a smooth and painless affair”

Add to that longer life expectancies, more robots - less job opportunities, already extremely high indebtedness, climate change, demographic changes, existing inequality and quite possibly much weaker economies… and we start getting the feeling that the only variables capable of balancing the disastrous pension outlooks… are those variables we do not even want to think of… down the line of epidemics and wars.

But how could it not be?

Never ever before has a generation consumed as much of any existing borrowing capacity to sustain its own consumption… so of course little is left for retirement.

And to top it up, we have had to suffer the risk aversion of manipulating regulators who do not want our banks to take the risks that building a healthy future economy needs.

When in the past I often protested the implicit promises of sustainable high rates of return of pension fund plans, I remember always ending up with that the best pension plan was to have children that loved you and who worked in an economy that was not too bad. And I have found no reason to change that opinion… much the contrary… although I now include loving grandchildren too J

PS. By coincidence I posted this opinion on pension funds and social security exactly 10 years ago (on my 56th birthday)

Who buy 50-year and negative yield bonds? Those who are not to be held too much accountable in the short term?

Elaine Moore writes that “Spain lures investors with 50-year bond” and Eric Platt in “Munis welcome the world’s yield starved” of May 13, writes about almost $10tn of bonds globally carrying negative yields”.

Who are those buying 50-year and negative yield bonds? Have those buyers anything to do with ordinary investors, like you and me Sir? Are we really talking about investors needing yields because they hurt in their own pockets or are these investors managing other not clearly defined peoples money, like pension funds, with the push comes to shove moment so far away they do not feel too much accountable to anyone, now.

Sir, in order to gauge the market better we might very well need to have the market data refined based on the type of investors.

@PerKurowski ©

If Draghi were a nanny at a sandbox, he would tell the kids to beware of the ugly, and trust much the nice looking

Sir, I refer to Claire Jones’s “Draghi rejects criticism of ECB rate drop” May 3.

Mario Draghi is the former chair of the Financial Stability Board and the current chair of the Group of Governors and Heads of Supervision of the Basel Committee for Banking Supervision.

As such, he has been and is a full supporter of the risk weighted capital requirements for banks, those supposed to make banks safer; those that for instance in Basel II assigned a risk weight of 20% to those rated AAA, and one of 150% to those rated below BB-.

I'm sorry, anyone who believes borrowers rated below BB- pose a greater risk for the banking system than those rated AAA, has never ever walked on Main Street and has no idea of life and risks.

Therefore Sir, I would never ever contract Mario Draghi to watch over my grandchildren at a sandbox, much less to be president of the ECB.

If Draghi now wants to convince us that negative interests are good, let him, I still don’t trust him.

Draghi puts, like so many others, like your Martin Wolf, a lot of the blame on a savings glut. That completely ignores the fact that so many SMEs and entrepreneurs are kept from using that saving glut to try to have a go at their dreams, only because of credit risk adverse bank regulators.

To even think you need negative interests to get an economy going is, how can I put it mildly, totally absurd.

By the way his squabbles with Germany are, in this context, completely irrelevant to me.

PS. Could Draghi by any chance just be another Chauncey Gardiner?

@PerKurowski ©

We are suffering from a well-disguised creative financial statism of monstrous proportions.

Sir, Dan McCrum writes: “it seems so inherently weird for about a third of debt issued by governments in the developed world to be bought and sold at negative yields” “Negative rates reverse assumptions about financial decisions” April 15.

Not weird at all: a) take away all central banks purchases of public debt with QEs, which helped to keep the saving glut intact or even increase it; b) get rid of regulations that assign the lowest risk weights and thereby the lowest capital requirements for banks to the borrowings of the sovereign monarch; c) stop what McRum mentions about “pension funds and insurers [having to] buy safe government debt irrespective of the price; and d) stop central banks from paying negative returns… and you would not see public debt bought and sold at negative rates.

What we are really suffering from is a well-disguised and utterly creative and non-transparent financial statism of montrous proportions.

The cost of all that is partly borne by savers and future pensioneers, but primarily by our children and grandchildren since the real economy will not grow as it could, consequence of all the credit opportunities denied “the risky” SMEs and entrepreneurs

@PerKurowski ©