The haircuts that will result from the mother of all market riggings... will be staggering.

Caroline Binham writes about the Bank of England’ “potential rigging of money market auctions”, “BoE embroiled in fraud probe of crisis-era liquidity moves” March 5.

Sir, whatever those rigging could have been, they must be really minuscule when compared to the mother of all riggings; that which occurred when regulators rigged bank regulations in favor of the sovereigns, to the extent of considering some of these infallible.

Sir, when a sovereign takes on too much credit, it will either pay you back a fraction, this is known as a regular haircut, like that Greece wants to do; or give you a negative interest rate haircut, like Germany does; or give you an inflation haircut, as that which they officially target; or give you a tax increase haircut (we citizens hold de-facto CoCos of our sovereigns); or give foreign currency based investors, a devaluation haircut, like that currently given by the Euro. And there might even be other haircuts I have missed.

And so, giving many sovereigns a zero risk-weight for the purpose of setting the capital requirements for banks, defies all rationality, and can only be explained in terms of the regulators rigging the regulations; whether for ideological reasons or only to ingratiate themselves with their bosses, the governments.

The consequence of a zero risk weight is that banks are able to leverage their equity immensely when lending to the sovereign and so, guaranteed, banks will lend the sovereign too much at too low interest rates… and so the consequential sovereign haircuts, in any which shape or form they come, will be staggering large.

Especially so when governments are, by for instance Martin Wolf, egged on to take advantage of “favorable market conditions for public borrowings”, in order to take on major infrastructure projects.