June 01, 2010

It is only by following the capital requirements for banks and the Potemkin ratings that you can understand our current predicament.

Sir Nouriel Roubini and Arnab Das evidence with their “Solutions for a crisis in its sovereign stage” June 1, that though experts, they are not sufficiently aware of what has really been going on in the area of sovereign finance.

I say this because in the area for “radical reform of finance” though they mention correctly the problem with the too large institutions, they fail completely to make reference to the much larger problem of how the financial regulators, in a non-transparent way and behind the backs of us citizens, are arbitrarily subsidizing sovereign finance by requiring the banks to hold lower capital requirements when lending to governments than when lending to their natural clients the small businesses and entrepreneurs.

Back in 2004 in the Financial Times 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... banks are up to the hilt in public credits.”

In this respect one of the most important information the Financial Times could provide its readers is the following table:

It is only be reading this table that you get to understand why there was a stampede after AAA rated private securities, even when these came with Potemkin ratings, and why there was so much lending to sovereigns… for instance to Greece which because of its ratings over between mid 2000 and December 2009 required the banks only to hold a paltry 1.6 percent.