July 07, 2015

FT Greece’s tragedy was more the result of malfunctioning bank regulations than a malfunctioning Euro.

Sir, Gideon Rachman writes: “both Greece and the rest of the eurozone should treat the Greek vote as an opportunity to rethink the malfunctioning euro project” “Europe should welcome Greece’s vote” July 7.

“Malfunctioning euro project?” Between June 2004 when Basel II was approved, and until end of November 2009 when Greece got down-rated to the BBB area, banks needed to hold only 1.6 percent in capital when lending to the government of Greece (8% standard requirement x 20% risk weight). That meant that banks could leverage their equity, and the explicit and implicit support they received from taxpayers 62.5 times to 1.

With regulators in the Basel Committee capable of creating idiotic regulations like that, the Greek tragedy just had to happen.

Where was the IMF when its opinion on this was sorely needed? I refuse to believe all professionals of the IMF think that the credit-risk-weighted capital requirements for banks do not dangerously distort the allocation of credit.

Not even the sturdiest Euro project can survive such kind of foolishness.

The best way to reduce the current animosity between Greece and for instance Germany is to tell it as it really was. The banks were given irresistible incentives to give Greece loans that by nature are irresistible to most politicians and government bureaucrats. Correct for that, punish the regulators, and then Greece (and Europe) has a chance to regain its footing.

Austerity is when you have resources and decide not to spend it. Spending financed with bank loans or other taxpayers’ money is not really the lack of austerity, it sounds much more like profligacy.