June 30, 2015

Europe, you want the truth? It was not the euro but bank regulators who did Greece in.

Sir, Gideon Rachman writes: “the link between the EU and prosperity will have been ruptured… it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment — the euro — it is now actively destroying wealth, stability and European solidarity”. “Europe’s dream is dying in Greece” June 30.

With my Op-Ed of November 1998 “Burning the Bridges in Europe” I can evidence having warned as clearly and as much as anyone about the euro… and so I could be writing here “I told you so”.

But no, I assure you that the real failed economic experiment that has created the current crisis was not the euro; it is the current bank regulations.

Basel II regulations of June 2004, because of how Greece was rated A+ to A- between November 2004 and January 2009, allowed banks to lend to Greece leveraging their equity more than 60 to 1. The capital (equity) requirement was a meager 1.6 percent (the basic 8% times a 20% risk-weight).

And so of course the Greek government was doomed to take on too much public debt. What Greek politician/bureaucrat would have been able to resists the offers of loans; and what banks would resist the temptation to offer loans to Greece, in order to earn fabulous expected risk-adjusted returns on their equity?

And let us be sincere, any bank lending to a Greek government of those of lately, has de facto waived his right to be repaid… even if he was tricked into doing so by its own regulator.

What would then have happened if there had been no Euro, and Greece had borrowed Dollars, Pounds or Deutsche Marks? The ensuing haircuts would be direct, or indirect by means of Drachma devaluations. Yes the crisis resolutions could perhaps been less traumatic but the crisis would still have happened.

Get any European country to use its own currency, but keep current distortions of bank credit in place, and they are still all doomed! If somebody needs to apologize to Europe, well that is the Basel Committee for Banking Supervision.


PS. Shortly after posting this, I found out to my amazement that even though no Eurozone nation can print euros on its own, for the risk weighted bank capital requirements, all their sovereign debts, independent of credit ratings, were assigned a 0% risk weight. Holy Moly, what if US had done the same with its 50 states?

PS. And then EU, even though their bank regulators were very much guilty of the Greek-neo-tragedy, showed no solidarity.


European citizens, beware of the Basel Committee’s bank regulators bearing gifts to your government bureaucrats