Creditworthiness should be grounded on what’s worthy of credit.
Sir, Martin Wolf writes “The vicious circle in which low creditworthiness begets unaffordable spreads, which beget debt crises and even lower creditworthiness.” “The threat of a lost decade in development”, Jan 11, 2023
NO! That vicious circle begins with too high decreed government creditworthiness.
November 2004, the Financial Times published a letter in which I asked “How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector?”
Sincerely, anyone lending money to a developing country that has adopted Basel Committees’ bank regulations, based on that its bureaucrats know better what to do with that credit they’re not personally responsible for than e.g., its small businesses and entrepreneurs, deserves losing money.
When participating in the Sustainable Debt Levels (SDL) debate my opinion was always: “There cannot be a road more conducive to debt turning unsustainable, than to award credits just because they are sustainable.”
And what is development much about? The willingness to take risks. Where does Mr. Wolf thinks the western world would be with the current risk weighted bank capital requirements? In Nirvana or still among the emerging developing nations?
Friedrich List wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” If we were to paraphrase List, if the high-income countries want to help, don’t kick away that ladder of risk taking that made them high-income.
1987, in reference to that credit risk aversion coming out of the Basel Committee for Banking Supervision, I ended my first Op-Ed ever with:
“If we insist on maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”
Sir, I feel that paragraph being just as valid as then… and much worse, not only to developing nations.
PS. At the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, this is the document I presented:
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