Europe has not yet learned the lesson that Greece, the first dead canary in the European mine offers… it must.

Sir, Francesco Giavazzi holds that Europe has spent way too much time and concerns on Greece, “Greeks chose poverty — let them have their way” June 10.

Indeed they have, but, unfortunately, they have still not learned the lesson Greece has to offer.

Greece got into trouble because even though no one really trusted its government it got too much credit. Why? Because regulators allowed banks all over to lend to Greece against minimum capital requirements, something that offered the expectations of very high risk adjusted returns on bank equity; something which therefore resulted too tempting.

And Greece has not been able to get out of there problems. Why? Because banks suffering scarcity of capital can still lend to Greece’s overinflated and over-indebted government against less capital than that what they are required to hold if lending to a Greek SME.

In 1988, the Basel Accord decided that for purpose of weighing the capital requirements for banks, the risk weight of a sovereign was zero percent while the risk weight of the private sector was 100 percent... which de facto also meant they considered that any government bureaucrat would be able to use bank credit more efficiently than a SME. At that moment a deadly venomous gas started to invade many economies… and Greece is just the first canary in Europe to drop… and, if nothing’s done to stop that gas, others will follow… until all are dead.

Europe you choose too risk-adverse regulators... wake up before its too late!

@PerKurowski

Energetic inflation possibilities

Sir, On June 28, Martin Wolfs ends his “Why the energy revolution will continue to power ahead” with an “anybody who thinks it will be easy to reduce energy consumption is simply dreaming”. He is wrong, as an economist he should know that it is a question of prices. Next to his there is an article by Francesco Giavazzi and Charles Wyplosz titled “When facts change so should central bank intentions” that verses on the oxymoronish issue of the transparency of central banks and comes in quite handy as a reminder that changed facts are most often not too transparently discussed.

As Wolf reminds us about, the average US consumer uses ten times more primary energy than an average Chinese, which set against a large economic growth rate in China and a limited increase in energy supplies should put extraordinary pressure on energy prices, as simple as that! In these circumstances, the US Fed, and the American leaders at large, should be speaking out to their fellow citizens telling them that if they do not reign in their consumption of oil, inflation will take off, they will have to raise interest rates, and then they will have to see jobs and property values all go, as simple as that! But Wolf might still be right, since expecting a central banker to acknowledge that other forces are more powerful than his and his buddies, or a leader to lead and not follow polls, well that could really be dreaming.

Francesco Giavazzi
Charles Wyplosz