How can you hold governments accountable, while their borrowings are being non-transparently subsidized?

Sir, Aveek Bhattacharya discusses various options to improve the productivity and effectiveness of public spending. “A future case for the ‘retro’ policy of public sector reform” FT February 18, 2022.

He fails to mention: Current bank capital requirements are much lower for loans to the government than for other assets. This translates into banks being able leverage much more their capital – and so making it easier for them to earn higher risk adjusted returns on equity when lending to the government than when lending to the citizens. That, which de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g., small businesses, turns into a subsidy of the interest rates government has to pay on its debts. Top it up with that the quantitative easing carried out by central banks is almost all through purchases of sovereign debt, and then dare think of what sovereign rates would be in the absence of such distortions.

Sir, if you really want to make your government more accountable, have them at least know what their real borrowing costs are.

Sir, in a letter you published in 2004, soon two decades ago I asked “How many Basel propositions will it take before regulators start realizing the damage, they are doing by favoring so much bank lending to the public sector?” Do you think this only applied to developing nations? If so, please open your eyes.

@PerKurowski

If we want public debt to protect citizens today and tomorrow, it behooves us to make sure it cannot be too easily contracted.

Sir, I refer to John Plender’s “The virtues of public debt to protect citizens” FT February 7, 2022.

Sir, as a grandfather I do fear debt burdens we might impose on future generations, but I’m absolutely not an austerity moralist. I know public debt is of great use if used right but also that the capacity to borrow it a reasonable interest rates (or the seigniorage when printing money), is a very valuable strategic sovereign asset, especially when dangers like war or a pandemic appear, and which should therefore not be irresponsibly squandered away.

In 2004, when I just finished my two-year term as an Executive Director of the World Bank, you published a letter in which I wrote “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage, they are doing by favoring so much bank lending to the public sector?”

1988 Basel I’s risk weighted bank capital requirements decreed weights of 0% the government and 100% citizens. It translates into banks being allowed to hold much less capital - being able to leverage much more, with loans to the government than with other assets.

Of course, governments, when their debts are denominated in the currency they issue, are, at least in the short-term and medium term, and in real terms before inflation might kick in, less risky credits. But de facto that also implies bureaucrats/ politicians/apparatchiks know better how to use taxpayer’s credit for which repayment they are not personally responsible for than e.g., small businesses and entrepreneurs. And Sir, that I do not believe, and I hope neither you nor John Plender do that.

Such pro-government biased bank regulations, especially when going hand in hand with generous central bank QE liquidity injections, subsidizes the “risk-free” rate, hiding the real costs of public debt. In crude-truth terms, the difference between the interest rates sovereigns would have to pay on their debts in absence of all above mentioned favors, and the current ultra-low or even negative interests they pay is, de facto, a well camouflaged tax, retained before the holders of those debts could earn it.

But of course, they are beneficiaries of all this distortion, and therefore many are enthusiastically hanging on to MMT’s type Love Potion Number Nine promises.

@PerKurowski

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.

Restoring healthy economic growth requires, sine qua non, getting rid of the distortions in the allocation of bank credit.Sir, Martin Wolf writes: “we are missing a profound transformation in how macroeconomic stabilisation will have to be conducted. Whether we like it or not, we must rely on active fiscal policy.” “Restoring growth is more urgent than cutting public debt” December 14.

Of course, we need active fiscal policy, but what about the private sector? E.g. we must be able to rely on effective allocation of bank credit. And that, because of the risk weighted bank capital requirements, is simply not happening. Two examples: 

Much lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats/politicians know better what to do with credit they are not personally responsible for than e.g. entrepreneurs. And unless we are communist, or in love with taking decisions with other people’s money, we know that’s not true.

Banks are also allowed to leverage their equity much more with residential mortgages than with loans to small businesses/entrepreneurs, those who create the jobs that helps service mortgages and pay utilities. That favors the increase of house prices and weakens the economy. Insane!

Wolf argues: “It is essential to lock in low interest rates. The maturity of UK public debt has always been relatively long. The aim now should be to make it as long as possible, by taking advantage of exceptional borrowing conditions.”

But, those “exceptional borrowing conditions” are artificial. What would the free market rate on UK public debt in absence of QEs and the low bank capital requirements mentioned? And is not the difference between that rate and current ultra-low interests, de facto, not a well camouflaged tax, retained before the holders of those debts could earn it?

We all, Martin Wolf included, should be able to have confidence in that our banks are regulated by sensible and competent people. For a starter that requires regulators understanding that those excessive exposures that could be dangerous to our bank systems, are always built up with assets perceived as safe, never ever with assets perceived as risky.

Sir, July 12 2012, Wolf wrote that when "setting bank equity requirements, it is essential to recognise that so-called “risk-weighted” assets can and will be gamed by both banks and regulators. As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." 

Seemingly he still does not ​really ​understand what I meant.

My 2019 letter to the Financial Stability Board

@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

Venezuela’s undernourished children urgently need a huge public debt into oil extraction conversion plan

Sir, Colby Smith and Robin Wigglesworth report that Venezuela’s “opposition government plans to hold all its foreign creditors to the same terms no matter the kind of debt held, which public entity issued it, and whether or not the creditor had previously gone to a courthouse and received a judgment.” But also “Claims connected to the alleged corruption of the Chávez or Maduro regimes will be excluded” as will be those presenting “pricing inconsistencies or pending arbitration claims [until] would investigated further” “Venezuela’s opposition sets out debt restructuring plans” July 4, 2019.

On that I agree, 100%. And Venezuela presents a golden opportunity for the citizens of the world, to be able to reach a clear definition on what should be considered odious credits, and to agree on their consequences.

But, what I do not see yet, is the real understanding that Venezuela’s most urgent problem is not debt restructuring, it is that its people are dying and foremost that its young are growing up undernourished.

Let’s face it; no matter how much humanitarian aid can come to Venezuela, the problems with lack of food, medicines and basic day to day needs will not be solved, until sufficient oil extraction generates sufficient oil revenues. And of course until sufficient oil extraction generates sufficient oil revenues, neither will there be enough money to pay off creditors.

So all my gut instincts, acquired by having actively and frequently participated in large debt restructurings in the private sector, but also by having promoted and completed projects of Venezuelan public debt to equity conversions into industry and tourism projects, tells me the following:

Venezuela needs to sit down with its creditors, today, and come up with a plan of how to convince qualified oil extractors to put their money into Venezuela and begin extracting oil as fast as possible. Of course for that to happen there would have to be a reasonable agreement on how to share the net oil revenues between oil extractors, creditors and the Venezuelan citizens.

I do not mention the Venezuelan government since I am convinced that the only way we Venezuelans can end up living in a nation, and not in somebody else’s business, is to have our government work exclusively with what we citizens provide it with by means of taxes. And because I have learned to utterly dislike redistribution profiteers, of all sorts.

That said of course I understand the need for some type of transition agreement, like a period in which more and more of those net oil and other natural resource revenues are turned over by the government to citizens. Like reaching 100% of it in ten years.

Sir, here's a tweet I have been sending out now and again for about two years: “So Venezuelans can eat quickly, hand over Pdvsa (and Citgo) to Venezuela’s creditors quickly, to see if they put all that junk to work quickly, to see if they collect something quickly, and pay us Venezuelans, not the bandits, our oil royalties quickly.

https://perkurowski.blogspot.com/2017/06/a-simple-but-complex-question-from.html”

PS. Instead of oil production I prefer to use the term oil extraction, since I feel that to be more respectful and grateful to that hand of the providence that placed oil under Venezuelan land.

PS. “Living in somebody else’s business” was how a woman from a Uganda described to me in 2013, her and our case.

https://theoilcurse.blogspot.com/2013/04/we-oil-cursed-citizens-we-do-not-live.html

@PerKurowski

Aren’t all nations, one way or another, tarred with a similar brush of nationalism?

Sir, Harriet Agnew and David Keohane report that, on the centenary of the end of the First World War, Emmanuel Macron railed against nationalism as a “betrayal of patriotism”, in an implicit rebuke to his US counterpart. “Macron attacks nationalism in Armistice Day rebuke to Trump” November 12.

Macron said: “By saying ‘Our interests first. Who cares about the others?’ we erase what a nation holds dearest, what gives it life, what makes it great, and what is essential: its moral values.” Is that not beautiful? Of course it is!

My problem though is that precisely these days I have been writing that the ending of the First World War, and the Versailles treaty, should provide an opportunity to reflect on the armistice conditions that are imposed on sovereigns, when they have to capitulate because of excessive loads of public debts. This especially because it is usually not only the defeated sovereign’s fault. 

If we look behind most odious debts, we will find surely find odious credits. In the case of eurozone sovereigns, like Greece, odiously dumb regulations too. Assigning a zero risk, as the European Commission did to a nation that is much indebted in a currency like the euro, which is not really its domestic (printable) currency, made absolutely no sense. That meant for instance that German and French banks could lend to Greece against no capital at all, and so, naturally, these banks could not resist the temptation of offering Greece too much credit, and Greece could not resist the temptation of taking on too much debt.

But what happened? The recent armistice conditions imposed by EU authorities required Greece to take on debt, much of it in order to repay German and French banks, leaving it with about a €345 billion debt, more than €30.000 per each Greek, in a currency that as I mentioned is de facto not their own. 

Sir, so I ask is that not just another Carthaginian peace? Viewed this way, no matter how right what Macron preaches is, does he really have the right to throw the first stone on “moral values”? Aren’t all nations, one way or another, tarred with a similar brush of nationalism?

Sir, this is no minor issue. Since Italy would most probably not walk the plank like Greece, the future of the Euro, and of the European Union is at stake… and that is something that those who might rightly defend the Remain against the Brexit, should at least out of pure precaution consider.

@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

Why should Donald Trump or Gillian Tett worry about US’s public debt when the experts, the bank regulators, assign it a 0% risk?

Sir, Gillian Tett, making it a Democrat vs. Republican issue, expresses anxiety about the US debt and suggests “a new version of the bilateral Simpson-Bowles Commission” “Investors start to fret about ballooning US public debt” November 9.

Sir, you know the regulators, for the purpose of bank capital requirements, assigned a risk weight of 0% to the sovereign debt of the USA and one of 100% to unrated American citizens (except when buying houses). That translates into that the interest rate politicians see is a subsidized interest rate, not its real cost. That dooms the US public debt to become, sooner or later, unsustainable… and especially so if markets begin to feel the US is losing its absolute military supremacy.

The bilateral Simpson-Bowles Commissionin 2010 presented many important recommendations that should be pursued, but it did not even mention the need to eliminate the regulatory subsidy to public debt.

Sir, unfortunately, getting rid of that distortion is no easy task, as regulators have really painted themselves into a corner. Can you imagine if regulators where to announce that the risk weight of US debt has been increased from 0% to 0.01%?

PS. In 1988, when with Basel I, statist regulators assigned that 0% risk weight the US debt was $2.6 trillion, now it is more than $22 trillion... but what has that to do with anything?

 

@PerKurowski

EU bank regulators have clearly proven themselves to be a source of systemic risk

Sir, Jan Toporowski writes that the “White House…represents a much more serious systemic threat to European banks. European governments and the ECB need to rethink how European banks are funded and regulated.”, “Threat to European banks of US political agenda”, August 14.

That could be but, foremost, it is the EU that needs to rethink how European banks are regulated. The 0% risk weight that for the purpose of bank capital requirements was assigned to Greece was, without any doubt, what caused that country’s excessive public debt tragedy. And did any EU authority offer to help Greece in order to compensate for that mistake? No! Not even the slightest “We’re sorry”. They do not even acknowledge their mistake… they just keep on blaming Greece.

@PerKurowski

If regulators, or even FT, do not questions the 0% risk weight of sovereigns, why should ordinary citizens care about public sector deficits?

Sir, Janan Ganesh writes“Americans no longer care about deficits, or at least no longer care enough. Their concern about them has waned since the mid-nineties” "How America learnt to love the budget deficit” June 28.

In 1988, with the Basel Accord, regulators introduced risk weighted capital requirements for banks and for that purpose assign risk weights to sovereigns of 0%. And European central banks assigned such 0% even to Greece, and Greece drowned in public debt, and yet no one, not even FT questions that 0% risk weight.

So Sir, why should ordinary Americans care about fiscal deficits when supposedly these can be financed with a 0% risk… because the government controls the money-printing machine?

Ganesh should not worry solely about America, with these statist bank regulators we are all being set up for a horrible crash. 

@PerKurowski

Is the Eurozone intent on once again give Greece's government a much lower risk weight than that assigned to a Greek entreprenuer?

Sir, Jim Brunsden writes: “Eurozone finance ministers are poised to give Greece debt relief —The plan is to help convince investors that Greece is ready to return to markets when its bailout programme expires in August.” “Creditors set to reach agreement over Athens debt deal” June 21.

That sure does sounds scary if the “convincing of the investors” once again includes giving the Greek government, for the purpose of the capital requirements of banks, a lower risk weight than it merits. That would be sheer cruelty.

Let us never forget (though the statists have classified it as something that should not be named) that it was the insane 0% risk weight assigned to Greece by European central bankers that got that country into its so tragic difficulties.

In my opinion the Greeks (or at least Yanis Varoufakis) should have taken those central bankers to the European Court of Justice long time ago. Imagine what would have happened to a credit-rating agency had it assigned such 0% risk weight to Greece?

https://subprimeregulations.blogspot.com/2011/11/who-did-eurozone-in.html

@PerKurowski

To salvage the European Union, its authorities must be held responsible for the travails of Italy, Greece and other.

Sir, with respect to what’s happening in Italy you write: “The guardians of the single currency failed to mend the roof while the sun was shining… Even if disaster has been averted on this occasion, the economic and political fragility of the eurozone remain all too clear” “Italy sets a stress test for the eurozone, again” June 2.

True. From the very start, soon 20 years ago, it must have been clear for all the proponents of the Euro that adopting it, meant for all countries using it giving up the possibility of adapt to different economic circumstances through foreign exchange rates adjustments.

And a Germany would benefit with a too weak for it Euro, and others, like Italy and Greece would suffer a too strong for them Euro.

What have the Eurozone authorities done to meet that challenge? Way too little! They busied themselves with all other type of lower priority issues and outright minutia. Worse yet, they also stupidly silenced the full disequilibrium signals that the interest rates on the Euro members’ public debt level could send the markets by assigning to all a 0% risk weight. Something that made the sun seem shine brighter than what it really did!

Fabio Panetta, the Deputy Governor of the Bank of Italy in a speech in London in February 2018, with respect to the possibility of raising the capital requirements on sovereign debt had the temerity to say: “The problem of high public debt should be addressed by Governments directly, with determination. It should not be improperly tackled with prudential regulation.”

If I were an Italian or a Greek, given a chance I would have told (shouted) him: 

“With your 0% risk weighing you regulators imprudently created temptations for our politicians to be able to take on much more public debt at much lower rates than would otherwise have been the case, and now you argue they should have been able to resist such temptations? Just the same way you argue that banks should have resisted the temptations to leverage over 60 times with assets that carried an AAA rating? Have you and your colleagues no shame?” 

Sir, while regulators keep on giving banks more incentives to finance the “safer” present consumption than the future “riskier” production, the chances for Europe (and America) to get out of its problems lie, at least in the case of Italy, as so many times before, in the strength of its economia sommerza.

@PerKurowski

Europe has been way to blasé about how the divisive forces of a common Euro within a not fully integrated Europe could gather strength.

Sir, I refer to Martin Wolf’s “Italy’s new rulers could shake the euro” May 23.

On the eve of the Euro, November 1998, in “Burning the Bridges in Europe” I wrote:

“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, i.e. 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.”

One could have expected that the fundamental menace that the Euro poses to the EU should have been in the forefront of everyone’s mind, and that much more would have been done to mitigate the dangers. But that has not really happened as its authorities wasted their time in so many other relative minutiae.

But what I never saw or knew when I wrote that article, as I had really nothing to do with bank regulations, was that bomb that was implanted in the middle of Europe, and in much of the rest of the world, that which required banks to hold more capital when lending to the citizens than when lending to the sovereign. That had to cause that excessive public sector indebtedness, which has now set the Euro problematic on steroids.

Sir, looking at what lays in front, one cannot help to think about the possibility that Brexit ends up being for Britain a very timely blessing in disguise.

@PerKurowski

The severity of Greece’s financial crisis was caused, directly, by totally inept bank regulators

Sir, Jim Brunsden, Mehreen Khan and Kerin Hope report “Greece is approaching a momentous moment: the end of eight years of international bailouts that forced the country into unprecedented belt-tightening in exchange for a cash lifeline from eurozone governments and the IMF” “Eurozone and IMF are still to agree a package as deadline approaches” April 27.

What I find impossible to understand is how European bank regulators, and European central bankers, have been able to hide from the Greeks the fact that they directly caused that crisis to be so much worse than it would have been, had they not meddled.

For the purpose of the capital requirements for banks, they assigned Greece’s public debt a 0% risk weight, and this as if Basel II’s credit rating dependent minuscule risk weight of 20% was not bad enough.

Would Greece have found itself in such troubles had banks needed to hold the same capital when lending to the Greek government than when lending to Greek citizens? Absolutely not!

Those retirees protesting against pension reforms, and all those young Greeks who have had to left their country in order to stand a better chance in life, should now all jointly be protesting in Basel against the Basel Committee of Banking Supervision, the Financial Stability Board and all bank regulators.

https://teawithft.blogspot.com/2015/06/europe-you-want-truth-it-was-not-euro.html

@PerKurowski

How long are you going to allow statist bank regulators subsidize the public sector borrowings with a zero percent risk weighting?

Sir I refer to Kate Allen’s and Chris Giles write “The total stock of OECD countries’ sovereign debt has increased from $25tn in 2008 to more than $45tn this year” “Rising tide of sovereign debt to hit rich nation budgets, warns OECD” February 23.

I do not know what the total OECD debt was in 1988, but the US public debt was t$2.6 trillion when then statist bank regulators assigned it a 0% risk weight. At end of 2017, much because of the subsidies imbedded in that 0% weight, US’s public debt was now US$20.2 trillion. It still has a 0% risk weight.

In 2004, in a letter you published I wrote: We wonder 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. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.

I came then from a development country, Venezuela, but that comment clearly applies to the OECD too.

In December 2009, on the eve of the new decade, FT also published a letter in which I wrote: “My worst nightmare is that unmanageable Versailles-type public debts will become fertile ground for those monsters that thrive on hardships”. That nightmare is only getting worse and worse.

@PerKurowski

If you want your sovereigns to have easier access to credit than your entrepreneurs, then you are not thinking on your grandchildren.

Sir, with respect to sovereign bond-backed securities you opine “bank regulation should be reformed to treat SBBS as favourably as national bonds in capital requirements — indeed, more favourably, since SBBS would make it less destabilising to have banks hold equity against concentrations of their own government’s bonds” “A rare chance to create a pan-eurozone safe asset” January 31.

What? Instead of a 0% risk weighting, these bonds collateralized with loans to sovereigns, should now have even a minus something risk weight percentage? So that banks can earn even higher expected returns on equity when lending to sovereigns? So that banks will lend even less to entrepreneurs. Sir, as a grandfather, let me tell you, that is a shameful proposition.

Defending the SBBS you argue: “the monetary union enjoys a well-deserved streak of growth”. Holy moly, what “well-deserved streak of growth” is that? Do you refer to that growth that has been financed by quantitative easing and by the low interest rates that makes it impossible for pension funds to live up to its offers? Come on! It is a totally undeserved growth… and one that will be very hard to repay.

You opine one should “create a truly pan-eurozone benchmark safe asset… the SBBS”

Sir, when you save, by investing in a bond, you should want the debtor invest your money well, so as to be able to repay you well. A eurozone SBBS seems here to be a bond designed so that no sovereign would have to repay it, and therefore no sovereign would be required to invest it well. Would you like your pension fund to invest in such SBBS with ultra low interest rates? 

And you also opine that “if issued in sufficient quantities, SBBS could help end the danger at the heart of the eurozone crisis: the “doom loop” between sovereign and bank debt. Banks holding senior SBBS would be safe from sovereign risk”

Sir, again, for the umpteenth time, that “doom loop” was created, in 1988, when regulators in their risk weighted capital requirements for bank assigned the sovereign a risk weight of 0% and the unrated citizens, those who form the backbone of any sovereign, a risk weight of 100%. And then I believe you said nothing about that!

@PerKurowski

Martin Wolf, public borrowings are being subsidized by bank regulations

Sir, Martin Wolf discussing the UK government’s private finance initiative (PFI) and costs of capital writes: “A sophisticated counter-argument is that government borrowing enjoys an implicit subsidy from taxpayers. That represents an unpriced insurance contract… This subsidy makes government funding look cheaper. But this is an illusion. “Public-private partnerships have to change to be effective” January 26.

Illusion? Does Martin Wolf really think that if banks had to hold the same capital against sovereign debt, than for instance against loans to entrepreneurs, the interest rate on public debt would remain the same?

Or, in a similar vein, does Martin Wolf really think that if banks had to hold the same capital when financing houses, than for instance when lending to entrepreneurs, the price of houses would not be negatively affected?

Mr. Wolf: Do you really think it is the risks for the banking system that are being weighted in those capital requirements? If so, I am sorry to have to break the bad news to you, again, for the umpteenth time. The risks that are being weighted for are the risks of the assets per se, which is why regulator want banks to hold more capital against what is ex ante perceived as risky than against what is perceived as safe.

Which explains how they could assign a risk weight of only 20%, to what rated AAA could pose a terrible threat to our banks, and a whopping 150%, to what rated below BB- bankers won’t touch with a ten feet pole.

John Kenneth Galbraith, in his “Money: Whence it came, where it went” (1975) wrote: “What people do not understand, they generally think important. This adds to the prestige and pleasure of the participants” … and yes, Sir, “risk weighted capital requirements” sounds indeed so delightfully sophisticated… almost as much as “derivatives”.

@PerKurowski

It’s not the role of regulators and central banks to help governments fund their operations, behind the back of citizens

Sir, Kate Allen writes that “euro-area financial institutions” have reduced their holdings of public debt “17 per cent in the past two years [but] the ECB made nearly €1.5tn of cumulative net purchases of eurozone public sector bonds through its quantitative easing programme — effectively replacing the purchasing role that banks had played. “Post-crisis reforms force European governments to curtail size of debt sales” January 5.

It all forms part of the same statist subsidizing of public debt. 

What would sovereign rates be if banks had to hold the same capital against sovereign debt than against loans to citizens; and if ECB had not purchased “eurozone public sector bonds through its quantitative easing programme”? The answer would have to be rates much higher, which would send quite different risk-free-rate signals.

In 1988, with Basel Accord, statist regulators, with their 0% risk weighted bank capital requirements, began subsidizing immensely government borrowings. When the 2007/08 crisis came along, central banks, perhaps in order to hide own their regulatory failures, with their quantitative easing purchases generated, wittingly or not, new sovereign debt subsidies.

This has dramatically changed the economical relations between governments and private sectors. It amounts to statist hanky-panky behind the backs of citizens. Since besides needing servicing it consumes, for nothing really special, sovereign indebtedness space that could be urgently needed tomorrow, it might become deemed as high treason by future generations. Where this is going to end is anyone’s guess, but it sure won’t be pretty.

@PerKurowski

Favoring government borrowings with quantitative easing and statist capital requirements for banks, dooms the sovereign to default.

Sir, Michael Hasenstab writes about how as a result of the US Federal Reserve’s “$3.6tn Federal reserve money-printing exercise [that] has financed approximately 20 per cent of the government’s net borrowing per year since 2008…and cutting interest rates to record lows” has distorted “the price of money, along with key metrics for valuing both financial and real investments” “Fed risks a sizeable hangover as it begins ‘the great unwind’” December 29.

Correct, but to really understand the magnitude of the distortions, we also must include those produced by the risk weighted capital requirements for banks... like the 0% risk weighting of sovereigns.

Allowing banks to hold different levels of capital against different assets means the risk-adjusted returns on bank equity are not solely cleared by markets but also by regulations. If one now decides that was a truly bad idea that dangerously distorts the allocation of credit to the real economy…how do you work yourself out of this hole?

For a starter, let us suppose you shoot for banks having to maintain 10% in capital against all assets, including sovereign then: how much additional capital need banks to have, or how much sovereign assets need banks to shed from their balance sheets? Either figure is bound to be mindboggling.

To be able to do so without freezing up the whole bank credit machinery, would perhaps require settling an important part of all bank credits, with some unredeemable negotiable bank shares.

Upsetting? No doubt, but the real costs of keeping going down that pro sovereign distorted route is domed to be filled with sovereign defaults.

Hasenstab begins with “In response to the global financial crisis, the US Federal Reserve took extreme but necessary measures to protect the American economy from collapse.” That is the conventional truth, I am not sure it is the whole truth and nothing but the truth. Sir, in August 2006 you published a letter I wrote titled “Long-term benefits of a hard landing” It would have hurt, not doubt, but I sincerely believe we would all have been breathing easier now had not the Fed protected the American and the world economy so much… and of course regulators having corrected what brought us that crisis to begin with… namely the so credit allocation distorting risk weighted capital requirements for banks.

@PerKurowski

Venezuela faces a restructuring between odious creditors and odious debtors, so it behooves us ordinary Venezuelans citizens to intervene and block any odious deals.

Sir, Jonathan Wheatley and Robin Wigglesworth when reporting on the surreal sort of restructuring of Venezuela’s debt by the equally surreal Maduro government write: “Venezuela is already a serial defaulter. It has defaulted on miners, oil companies and other enterprises whose assets it has seized without compensation. It has defaulted on unpaid suppliers to PDVSA, the national oil company. Most seriously, it has defaulted on its people, denying them access to basic foods and medicines, causing an epidemic of weight loss and turning injury or illness into a mortal danger.” “Venezuela bond repayments: dead and alive” November 28.

Sir, the creditors, if they had carried out any minimum due diligence, would have been perfectly aware their financing would not be put to any good use, so for me, all their loans, given only because of juicy risk-premiums or other profit motives, are just odious credits.

And the borrowers, knowing very well they were contracting that debt for no good purposes at all, defines all these borrowings to be odious debts.

So here we are Venezuelans citizens, with children, parents and grandparents dying for lack of food and medicines. Are we now just supposed to sit down and allow this restructuring to happen on whatever odious terms the creditors and the debtors agree on in a petit committee?

No way! As a minimum, for a starter, our General National Assembly not yet in exile needs to authorize our Supreme Court of Justice in exile, to take charge so as to at least determine what could be deemed to be bona fide, dubious, or outright odious credits.

https://teawithft.blogspot.com/search?q=odious+credit

@PerKurowski

A former Executive Director of the World Bank, for Venezuela (2002-2004)