If Germany’s euro debt gets to be redenominated in Deutsche Marks, what would happen to its commercial surplus?
Sir, Kate Allen writes: “German bonds, or Bunds… are the eurozone’s safe asset… the spread against equivalent Italian bond yields to about 2.9 per cent.” “Tail Risk” February 19.
So if Bunds is the Eurozone’s safe asset, how come EU authorities assign it a risk weight that is just the same as all other Eurozone sovereigns’ debts, namely 0%? And this even when they all are indebted in a currency that is not really their own domestic (printable) one.
That 0% risk weight translates into that European banks do not have to hold any capital against debts of the Eurozone sovereigns… a clear subsidy... especially to those sovereigns most remote from earning that 0%.
So, had that not been the spreads of many eurozone sovereigns against Bunds would have been much larger, and in such case many of those sovereigns, like Greece, like Italy, like Spain, like Portugal would have had to borrow less, and would therefore have had to reduce their commercial deficits, reducing by that Germany’s commercial surplus.
Allen opines: “Investors need to put their money somewhere and [if there are not enough Bunds they are forced into substitutes which then rapidly become overloaded and suffer price bubbles.”
Indeed but when we consider that much of that investment money was supplied by ECB buying European sovereign debt, including Bunds, perhaps we should start by looking there before we might add fuel to a dangerous fire.
@PerKurowski
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