Does Christine Lagarde really know about the zero risk weighting of eurozone sovereigns bomb?

Sir, Anne-Sylvaine Chassany writes how Christine Lagarde was interrogated in 2016 about an incident while she was the finance minister in France, related to a vital memo she missed, and which led to herfailing in “preventing an allegedly fraudulent €403m state payout”. “Although spared prison and a fine, she was found guilty of negligence, though the court decided the conviction would not constitute a criminal record” “Lagarde’s lesson in how to deal with imposter syndrome” July 10.

That must have been a very uncomfortable experience for Ms. Lagarde. And in this respect I wonder if she has for instance read what Sharon Bowles the then European Parliament’s Chair Economic and Monetary Affairs Committee opined in 2011?

In a speech titled “Regulatory and Supervisory Reform of EU Financial Institutions – What Next?” given at the Financial Stability and Integration Conference, 2 May 2011 Bowles said: 

“I have frequently raised the effect of zero risk weighting for sovereign bonds within the Eurozone, and its contribution to removing market discipline by giving lower spreads than there should have been. It also created perverse incentives during the crisis.”

Sir, that was eight years ago… and Mario Draghi or anyone else did not defuse that bomb and so it is still ticking.

A zero risk weighting of any sovereign bond, for purposes of bank capital requirements anywhere is lunacy to me, as it de facto implies believing that government bureaucrats know better how to use bank credit they are not personally liable for, than for instance entrepreneurs. But, when it is assigned to sovereigns who take on debt denominated in a currency that is not their domestic printable one, as is the case in the eurozone, then it goes way beyond lunacy.

Anne-Sylvaine Chassany writes that againChristine Lagarde faces a chorus of doubters. Ms Lagarde is not a monetary policy specialist or an economist by training, skills which, in a perfect world, ought to be part of the job description to succeed Mario Draghi at the helm of the European Central Bank.

That is of little concern to me; there should be more than enough monetary policy specialist or economists and, seeing what many of them have been up to lately, perhaps even too many. 

But does Ms Lagarde really know what she is getting into? Does she really think she can help defuse that zero risk weighting for eurozone sovereign bonds bomb that, if it explodes, will take down the euro, and perhaps the European Union with it?

Someone should ask her that. That is many times more important than the vital memo she missed seeing. Why not the Financial Times?

But then again would anyone really be able to defuse that bomb?

PS. Perhaps the title of this should be "Does Christine Lagarde know she might be on a suicide mission?

@PerKurowski