April 02, 2013

Current financial fragmentation is not a “north vs. south”, but an “infallible vs. risky” issue

Sir, when Michel Steen reports “Draghi faces bailout grilling” April 2, he refers to the problem of a “financial fragmentation” which has cleaved the eurozone “into two broad groups – northern countries that enjoy the official low rates and southern ones that, effectively, do not [something] known in monetary policy jargon as the impairment of its transmission mechanism”.

Forget it! This is not a south-north fragmentation. The most fundamental impairment of the financial transmission system occurred when bank regulators decided they could, for the purpose of setting capital requirements for banks, divide borrowers into “The Infallible” and “The Risky”, and all as if the banks were completely infantile and were not already taking notice of the fact that there are some borrowers riskier than others.