With respect to Eurozone sovereign debts, European banks were officially allowed to ignore credit ratings.

Sir, Rachel Sanderson writes, “Data from the Bank of Italy on holdings of Italian government debt, usually the prime conduit of contagion, suggests any Italian crisis now will be more contained than in the 2011-12 European debt and banking crisis, argue analysts at Citi” “Rome political climate is uncomfortable even for seasoned Italy Inc.” August 22.

“But Citi [also] warns of sovereign downgrades. Italy is now closer to the subinvestment grade rating threshold compared with 2011, according to all three main rating agencies.”

But the European authorities, European Commission, ECB all, for purposes of Basel Committee’s risk weighted bank capital requirements, officially still consider Italy’s debt AAA to AA rated, as they still assign it a 0% risk weight.

So in fact all the about €400bn of Italian government debt Italian banks hold, and all what the European financial institutions hold of about €460bn of Italian sovereign debt, most of it, are held against none or extremely little bank capital. Had EU followed Basel regulations they would have at least 4% in capital against these holding, certainly way too little. Lending to any private sector Italian would with such ratings would require 8% in capital… the difference is explained by the pro-state bias of the Basel Committee. 

And that is a political reality that must also be extremely uncomfortable for the not sufficiently seasoned European Union Inc.

Sir, what will the rest of Europe say when they realize that it was not all Italy’s fault, as it was not all Greece’s fault?

@PerKurowski