Worse than odious debt that some might feel urgently needed, is odious credit that needs not to be given

Sir, Robin Wigglesworth writes: “An archaic, often-mentioned but never-invoked legal doctrine called “odious debt” could be tested for the first time in history in Venezuela should the regime be ousted from power.” September 12.

I feel that for us citizens, everywhere, even more important than the concept of odious debt, is to define a legal doctrine on “odious credit”, this for the simple reason that the first would not exist without the latter.

In other words, are we to hold an uneducated trying to survive day-by-day thug like Nicolas Maduro, to higher moral standards than those highly educated in Goldman Sachs’ who, if their education is worth anything, should be able to survive without financing badly masqueraded violations of human rights? I think no!

Sir, we do need a Sovereign Debt Restructuring Mechanism, urgently, but if such an SDRM is really to mean something good for the world, then the concept of odious credit has to be an integral part to it.

http://unsustainabledebtsustainability.blogspot.com/2004/04/odious-credit.html

@PerKurowski

Argentina, and so many others need, urgently, clear definition of what are odious public-sector credits and borrowings

Sir, I refer to Benedict Mander’s “Macri is surrounded by former bankers as he seeks international investment” May 13.

I have always been convinced that most of debt that at any point of time gets to be qualified as “odious”, has had its beginnings in odious credits or in odious borrowings.

Odious public sector credits are those that lenders approve even though they know the resources will not be put to a good use, only because the risk-premiums are right. A really extreme example of this would be an oversubscribed public bond issue to finance something like the crematoria ovens of Auschwitz. 

Odious public sector borrowings are those carried out by governments, in lieu of real correcting measures, or because of other political short term interests, without any consideration as to how it is going to be repaid and who are going to repay, usually those of a generation down the line.

And so therefore I have always held that, no matter how important it was to introduce a Sovereign Debt Restructuring Mechanism (SDRM) that had to begin by defining clearly what should be considered as odious credit or odious public borrowings. That since these, for the good of us all, should not receive the same treatment as bona-fide credits.

And in this respect when I read that “luring money back into an economy starved of investment after a decade of interventionist policies” is considered “a vital element” I feel it might be time again for us to prepare to cry for Argentina.

And, just in case, this has nothing to do with who governs Argentina, in fact I very much welcome the recent change. It is what I have opined in my country Venezuela, pre-Chavez, during-Chavez, and that I will surely also opine after the long overdue Chavez/Maduro change comes into fruition.

To use a credit card to buy food and medicine for the people is understandable but, for governments to load up on credit card debt as a substitute for doing the reforms that are needed, or to finance new investments supposed to “take care of it all”, that is just immoral.

When it comes to public sector debt, and for instance capital requirements for banks, it would serve us citizens much better if ethic or good governance ratings were used instead of simple credit risk rating… a good credit risk rating resulting from the government receiving large oil revenues, is just to add salt to injury.

@PerKurowski ©

There’s a curious silence about the odious distortion the Basel Committees' credit-risk-weighted capital requirements produces

Sir, suppose Martin Wolf owned an unrated SME, and Per Kurowski was the CFO of an AAA rated corporation, and both wanted to obtain bank credit for their company. 

Traditionally, naturally, before the Basel Committee’s risk-weighted capital requirements existed, because of clear differences in the perceived credit risk, Per Kurowski would be able to negotiate much more credit, and at much lower interest rates for his AAA rated corporation, when compared to what Martin Wolf could do for his unrated SME.

But now, because regulators decided banks also need to hold more capital when lending to Wolf’s SME than when lending to Kurowski’s AAA corporation, the differences in the amounts of credit obtained and the interest rates charged would be even larger. In other words Wolf’s SME, relative to Kurowski’s AAA, would obtain even less credit, and would need to pay even higher interest rates, than in the absence of these credit risk-weighted capital requirements.

Of course Kurowski does not complain that his AAA rated corporation has access to even more credit at even cheaper rates, and consequentially he himself to larger bonuses.

And of course banks, as a consequence of having to hold little capital and therefore be able to leverage hugely when lending to Kurowski’s AAA rated corporation, do not complain about being able to earn higher risk-adjusted returns on equity when lending to Kurowski’s AAA rated corporation. In fact obtaining the highest risk adjusted returns on equity for what is perceived as safe, sounds like a banker’s dream come true.

But Martin Wolf should of course be furious that bank regulators deny his SME fair access to bank credit.

And of course anyone who calls himself a progressive should be furious against this odious regulatory discrimination that denies fair access to the opportunity of bank credit to those who already find it hard enough to obtain bank credit. That clearly promotes inequality.

And of course anyone who calls himself a free markets defender should be furious about this odious regulatory distortion of the allocation of bank credit to the real economy.

But curiously, Martin Wolf as a journalist, FT, progressives and free market defendants, they all keep mum about it. Is it not a strange world?

Sovereign Debt Restructuring Mechanisms (SDRM) starting with salvaging and not with preventing, are moral hazards

Sir, Elaine Moore’s when reporting on Sovereign Debt Restructurings Mechanisms quotes Anne Krueger with: “Government should be able to declare bankruptcy, just as companies do. Instead of bailouts and lost decades of austerity, they should be able to wipe the slate clean and start again.” “Economist in a hurry” August 8.

“No!” if it means irresponsible governments will find it easier to start from clean slates

“No!” if it means irresponsible creditors will be bundled together with responsible ones.

“Yes!” if it means responsible governments will have a chance to restart their country.

“Yes!” if it means odious creditors will be required to assume the largest share of sacrifices.

And for the latter to happen, nothing better than assuring that any Sovereign Debt Restructurings Mechanism developed, diminishes the possibilities of being needed.

In this respect I believe any acceptable SDRM should begin with:

First and foremost by eliminating all incentives that can help governments contract too much debt… like banks being allowed to hold much less capital when lending to sovereigns than when lending to citizens.

And then by defining clearly what, when compared to ordinary credit to the public sector, should be deemed as odious credit. For instance, credit not awarded in a transparent way, or awarded when it was clear that the resulting debt might not be sustainable, and was therefore of speculative nature, should not receive the same treatment in a SDRM, as public credit awarded transparently and when there was no doubt about the sovereigns capacity to serve it.

Anne Krueger holds “If you get to a stage where a country’s debt is so large that it cannot grow, then you need to rethink”… and that to me, as an ordinary citizen, is best done by thinking and rethinking about how it landed itself in such a mess.

PS. The article ends quoting Krueger with “And there will be a next crisis, though where it comes from is likely going to take everyone by surprise”. If only she could convince our bank regulators of that. They still believe that the unexpected problems, for which banks need to hold capital, should be based on the expected problems derived from credit risk.

@PerKurowski

You want faster growth? You want more widely shared growth? Then get rid of current bank regulators.

Sir, Martin Wolf writes: “This is the time to develop ideas on how to achieve the party’s priorities of faster, more widely shared growth” “Two cheers for Corbyn’s challenges to economic convention” October 2.

You want faster growth? Then take away the odious regulatory discriminations against the risky and let the SMEs and entrepreneurs, the tough we need to get going when the going gets tough, have fair access to bank credit.

I quote from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

You want more widely shared growth? Then take away the odious regulatory discriminations that stops banks from giving the risky SMEs and entrepreneurs the opportunity to fair access to bank credit they deserve.

I quote again from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

But the sad fact is that no new or old Labor, or anyone, would be able to get that advise from a brains trust of seven left-of-centre economic advisers who have never been out on Main-Street, who hate government austerity, but who love bank credit austerity.

Our formal banks have been embraced by a loony regulatory risk aversion that wants to clear, in the capital of banks, the perceived credit risk already cleared for by banks with risk premiums and size of exposures. Or we free them for that or the interests of economic growth, job creation and equality might be best served by unregulated banks operating in the shadows… a la Banca Sommersa style.

@PerKurowski

Odious debt is often mentioned, but its origin is most often those odious credits and odious borrowings that abound

Sir, Benedict Mander, with respect to Argentina issuing debt writes: “These yields don’t exist anywhere else in the world in countries with such low levels of debt,” said [enthusiastically] Facundo Gómez Minujín, managing director at JPMorgan’s Argentina unit. “Argentina targets $30bn debt issuance” May 2.

Is that not a sign that Argentina, if it took on debt, should demand to pay less or just leave it like that?

And by the way, what has the fact that Argentina has low level of debts to do with anything? Is not debt to be contracted only if you have something really worthy to do with it, something that will allow you to repay the debt and leave some decent returns?

I do not know much about Argentina, and I do not intend any similitude, but I do know that I profoundly dislike all those who knowing how bad it was run, and how little with its huge oil revenues it should need credit, still financed the disastrous XXI Century Socialism Venezuela, only because risk premiums seemed good. Had they not done so, Venezuela could perhaps already have been able to rid itself of The Tragedy. Had they not done so, Venezuela would not, on top of all its other current mindboggling difficulties, need to add the service of totally unproductive contracted debt.

For me good governments are those who stay out of debt even if conditions seem fair, only on account that debt basically represents advance fiscal revenues, to be paid later by the next generation.

We do need a Sovereign Debt Restructuring Mechanism (SDRM) but, if it is going to produce reasonable results for the citizens, then it has to begin by defining very clearly what is odious credit and what are odious borrowings. I have sometimes argued that any public borrowing that offers to pay more than a specified number of basis points over what the best debtor is paying, could be considered as odious.

I know it is way too extreme, and has absolutely nothing to do with Argentina or Venezuela, but the question needs to be asked, so that the point I am making becomes utterly clear: Would bonds issued for the construction of the crematoria ovens in Auschwitz be included in any debt restructuring… or should these just be thrown out… or should the financiers also be judged?

@PerKurowski ©

Ben Bernanke: “The Courage to Act” - in the midst of a sissy regulatory aversion against banks taking credit risks?

Sir, I refer to Sam Fleming’s comment on Ben Bernanke’s book “The Courage to Act”, “Bernanke attacks Capitol Hill over crisis role” October 6.

From the book he quotes “The Fed can support overall job growth during an economic recovery, but it has no power to address the quality of education, the pace of technological innovation, and other factors that determine if the jobs being created are good jobs with high wages.”

There is an Equal Access to Education Act. Suppose there were some few agencies that rate the qualifications of a student to make it meritoriously; and suppose universities used these ratings during their pre-screening process. What would America say if the Department of Education ordered these Education Worthy ratings to be considered once again in the final selection… and with double importance?

There is an Equal Credit Opportunity Act (Regulation B). Bankers already consider credit risks when setting interest rates and deciding on the size of exposure, among others the information provided by credit ratings. But then bank supervisors decided, by means of the Basel Accord in 1988 and its subsequent revisions, that the capital banks would be required to hold, were also to be based on exactly the same credit risk perceptions. 

That of course meant that anyone who was perceived “risky” from a credit point of view would be considered doubly risky, while anyone perceived “safe” would be considered doubly safe. And of course that has completely distorted the allocation of bank credit and thereby hindered job creation and, by keeping a lid on opportunities, helped cause more inequality.

On this odious discrimination against fair access to bank credit, Ben Bernanke has kept absolute silence. Most probably he did so completely unwittingly, but that is not a valid excuse for a chairman of the Federal Reserve. But of course he is far from being the only one to blame.

To top it up Bernanke names his book “Courage to act”; when the last decades have been signed by a sissy regulatory aversion to credit risk... as if avoiding taking the credit risks that helped the country to become what it is, has now become the only purpose of banks… in the Home of the Brave. Hah! 

With bank regulations like these, clearly the “American economy will fall tragically short of its extraordinary potential”. 

By the way, regulators assigner a zero risk weight to the Sovereign (the government), while the private sector, that one were most citizens that make up a Sovereign usually work, got a 100 percent risk weight. Anybody who does not find that strange, harbors a statist heart and mind.

I can hear all the SMEs and entrepreneurs who thanks to bank regulations never got their chance rocking away:

You ain’t nothing but a statist… scheming all the time.

You ain’t nothing but a statist… scheming all the time.

You ain’t never created something… and you sure ain’t no friend of mine.

PS. Courage is involved when taking calculated risks, not when taking desperate measures. 

@PerKurowski © J

Venezuela faces a restructuring between odious creditors and odious debtors, so it behooves us ordinary Venezuelans citizens to intervene and block any odious deals.

Sir, Jonathan Wheatley and Robin Wigglesworth when reporting on the surreal sort of restructuring of Venezuela’s debt by the equally surreal Maduro government write: “Venezuela is already a serial defaulter. It has defaulted on miners, oil companies and other enterprises whose assets it has seized without compensation. It has defaulted on unpaid suppliers to PDVSA, the national oil company. Most seriously, it has defaulted on its people, denying them access to basic foods and medicines, causing an epidemic of weight loss and turning injury or illness into a mortal danger.” “Venezuela bond repayments: dead and alive” November 28.

Sir, the creditors, if they had carried out any minimum due diligence, would have been perfectly aware their financing would not be put to any good use, so for me, all their loans, given only because of juicy risk-premiums or other profit motives, are just odious credits.

And the borrowers, knowing very well they were contracting that debt for no good purposes at all, defines all these borrowings to be odious debts.

So here we are Venezuelans citizens, with children, parents and grandparents dying for lack of food and medicines. Are we now just supposed to sit down and allow this restructuring to happen on whatever odious terms the creditors and the debtors agree on in a petit committee?

No way! As a minimum, for a starter, our General National Assembly not yet in exile needs to authorize our Supreme Court of Justice in exile, to take charge so as to at least determine what could be deemed to be bona fide, dubious, or outright odious credits.

https://teawithft.blogspot.com/search?q=odious+credit

@PerKurowski

A former Executive Director of the World Bank, for Venezuela (2002-2004)

If we want debt to earn the credit it merits, we need to get rid of current bank regulators.

Sir, I refer to Nigel Dodd’s, a professor at LSE, “Cast aside the moral judgment and give debt the credit it deserves”, November 1.

Unfortunately it seems that professor Dodd has not heard about the arguments against odious and stupid bank regulatory discrimination based on perceived credit risks. Had he done so, I believe his article would have taken a different form.

I say this, especially when reading his conclusion: “Credit is morally neutral. As an institution, it is neither good nor bad; and it is a grievous error to confuse creditworthiness with moral probity. Credit should be available to those who need it most. The price should be reasonable, and it should entail neither stigma nor penury.”

Indeed, professor Dodd, but one of the most important reasons for why this is not so, is the bank regulations that have been in place for about three decades; most especially since Basel II was approved in June 2004.

Those regulations order the banks to hold much more equity when lending to those perceived as “safe” than when lending to those perceived as “risky”; which of course allows banks to earn much higher risk-adjusted returns on equity when lending to the safe, than when lending to the risky.

And that means that regulators, on their own, without our approval, decided that bank credit should primarily be available to what from a credit risk point of view was perceived as “safe”, like financing house purchases, or lending to “the infallible sovereigns” or to the members of the AAAristocracy.

And which also means that anyone perceived as “risky”, would have to pay even more risk premiums, or have even less access to bank credit.

And that means denying fair access to bank credit to those we, who depend the most on the real economy, most need and want should have fair access to it, like the medium and small businesses, the entrepreneurs and the start-ups.

If we want debt to get the credit it deserves, we need to get rid of these regulators.

Venezuela poses a unique opportunity, for all citizens of the world, to clearly define what should be considered as odious credits, and how these should be treated.

Sir, Colby Smith and Robin Wigglesworth quote a holder of Venezuelan debt with: “The ultimate objective is to reach a point where [Venezuela] regains market access at market-determined terms without the risk of renewed default”,“Venezuela debt fight pits veterans against hot-headed newcomers” March 13.

It is absolutely clear Venezuela needs much financing to reconstruct its entire run down basic infrastructure but, as a citizen, having seen how much public indebtedness goes hand in hand with corruption and waste, and how it so often makes it harder for the private sector to finance its needs, I would not mind Venezuela not reaching that “ultimate objective” for a long-long time, especially not as long as the government already receives directly all oil revenues.

Our Constitution clearly establishes that all “Mineral and hydrocarbon deposits of any nature that exist within the territory of the nation… are of public domain, and therefore inalienable and not transferable” and yet 99% of the debt it contracts is implicitly based on its creditors having access to the revenues produced by extracting Venezuela’s non-renewable natural resources, mainly oil. 

So now, the least our legitimate creditors could do, is to help us extract oil; and to that effect the following is a message I have been tweeting for about two years: “For Venezuelans to be able to eat quickly, starts by quickly handing over PDVSA’s junk to its and Venezuela’s creditors, so that they quickly put it to work, to see if they are able to quickly collect something, so to pay us citizens, not bandits, some oil royalties quickly”

But, that said, what is most important is to classify all Venezuela’s debts. Many of these were not duly approved; others had a large ingredient of corruption and lack of transparency and so all these must be scrutinized in order to establish their legitimacy.

For example, when Goldman Sachs in May 2017 handed over $800 million cash in exchange for $2.8billion Venezuelan bonds paying a 12.75% interest rate, to a notoriously corrupt and inept regime that was committing crimes against humanity. Especially since Lloyd Blankfein cannot argue an “I did not know”, that to me is as odious as odious credits come.

Sir, it behooves all citizens of the world to use this opportunity to set up an adequate defense against governments anywhere, mortgaging their future with odious credit/odious debts.

That also includes stopping statist regulators from distorting with a 0% risk weight the allocation of bank credit in favor of the sovereign, against the 100% risk weighted citizens. 

@PerKurowski

Venezuela, and the world, is in need of a clear definition of what are odious credits and odious borrowings.

Sir, you write “China, which has loaned Caracas more than $65bn in return for oil deliveries, potentially has a big role to play. Having extended some of these loans’ maturities, officials in Beijing said that they hoped “Venezuela can properly handle” its current situation” “The ice finally begins to crack in Venezuela” May 19.

For me there are odious credits and odious borrowings, and you can bet Britain would never ever, or at least not currently, be allowed to take on public debt in such a non-transparent way, as when China lent money to the 21st Century Socialism.

You write: “A lack of basic goods and medicine has led to protests and lootings. Shortages of foreign currency, prioritised to pay overseas debts, have forced a 40 per cent drop in imports in the past year”

Who are these powerful foreign creditors that force the government to prioritize paying debt over securing food and medicine to its people? Could they be the same vagabonds that have ruined the country and are now set on to re-ruin it?

Should the creditors and or their advisors, knowing what the government was doing, have lent to Venezuela only because the risk premiums were attractive? And if so, should they have a right to be repaid?

I am not by far implying that something similar was the case in Venezuela, but, only to make the point, let me ask: Should one financing the cremation ovens of Auschwitz have a right to be repaid?

In the world there is much need for a sovereign debt restructuring mechanism but, if that is going to make us citizens any good, before entering in the notion of odious debts, it must clearly define what is odious credits and odious borrowings.

By the way, if such a definition had existed, and could have applied to odious mortgages such as those that ended up in AAA rated securities, then you might have saved yourself from the 2007-08 crisis.

PS. Are those recommending investors to lend to a country that has made no merits to receive credit, only because the rewards are high, not de facto pimping a country?

PS. Any government having to pay 3% more for public debt than the one paying the least, should not have right to contract debt.

@PerKurowski ©

The best Sovereign Debt Restructuring Mechanism (SDRM) is the one that most reduces the need for it.

Sir I refer to your discussions about a “holy grail… a sovereign debt restructuring mechanism (SDRM) — a bankruptcy procedure for states.” “To err is human, to forgive is statesmanlike”. July 27

Even though I agree with the need for a SDRM, we citizens need to be very alert to how it is designed. Bank regulation’s bureaucrats/technocrats, behind our backs, have already given public borrowings an enormous unearned/undue advantage, by allowing banks to hold much less capital against public debt than what they are required to hold against private sector debt. 

If on top of that we now also make it easier for government bureaucrats/technocrats, hiding behind the mantle of “sovereignty”, to get out of the debt they contracted, then we have really messed things up for ourselves.

In this respect I believe any acceptable SDRM should begin with:

First and foremost by eliminating all incentives that can help governments contract too much debt.

And then by defining clearly what, when compared to ordinary credit to the public sector, should be  deemed as odious credit. For instance, credit not awarded in a transparent way, or awarded when it was clear that the resulting debt might not be sustainable, and was therefore of speculative nature, should not receive the same treatment in a SDRM, as public credit awarded transparently and when there was no doubt about the sovereigns capacity to serve it.

Let us be very clear about that the best SDRM is the one that reduces the need for it.

And of course it is human to err… but that does not mean that bank regulators should not admit their mistakes and be held accountable for it. Pseudo-statesmen forgiving behind curtains their own mistakes... really?

How can you ask creditors, or taxpayers, to take a hit on Greece, while pardoning, even promoting, bank regulators?

@PerKurowski

Greece’s odious debts resulted from odious credits… those that too many want to keep flowing

Sir, I refer to Anne-Sylvaine Chassany’s FT-Lunch with Thomas Piketty, “Europe is choosing the wrong path” June 27. In it, Piketty argues for the cancellation of much Greek debt.

Anyone thinking that Greece’s debt is not already de-facto canceled, by virtue of it being impossible to serve, is either cuckoo, in desperate need of some blissful ignorance, or wants to, instead of honest haircuts, use non-transparent means like inflation to settle it. And so of course the Eurozone’ air would be much clear by biting the bullet. But two comments needs to be made:

First that that should have to go hand in hand with analyzing why Greece got into troubles, in order to avoid a repeat… and that seems to be of no concern to most, including Thomas Piketty.

The over indebtedness of Greece resulted from odious credits that would not have been extended, were it not for regulatory incentives; namely the fact that banks were allowed to leverage immensely their equity when lending to the government of Greece as compared with what they could leverage lending to for instance European SMEs.

The problem though is that, may we say naturally, because of conflicts of interest, too many in Europe, like government employees and/or statist ideologues, are too interested in keeping the flow of these easy credits going. In other words, too many have found redistribution and cleaning up debris after the storm to be a politically more rewarding activity than producing or building more storm resistant houses… and this guarantees the continuance of Europe’s “deeply flawed governance”.

Secondly, allowing banks to hold less equity against the borrowings of “the safe”, than against the borrowing of “the risky”, signifies a subsidy to those who already have more and cheaper access to credit, and a regulatory tax on those who already have less and more expensive access to bank credit. And this translates into an odious and dangerous distortion of the allocation of bank credit to real economy, and which also, by negating opportunities to those most in need of it, is an important driver of inequality. Not wanting to understand this could be explained in terms of intellectual and moral procrastination… and in Europe, I am sad to say to many seem to be engaged in that.

@PerKurowski

The Venezuelan National Assembly, the real not the fake, needs to be careful it does not legitimize odious credits

Sir, Henry Foy, Robin Wigglesworth and Gideon Long report on how “Venezuela [Maduro] has invited international bondholders to negotiations over its foreign debt as Caracas seeks to mitigate the impact of US sanctions and survive a deepening economic crisis.” “Venezuela sets up talks on foreign debt” September 9.

Legitimate debt/credit, sort of legitimate debt/credit, more dubious debt/credit and clearly odious debt/credit composes Venezuela’s public debt. It behooves Venezuela, as well as all citizens in the world who could in the future face similar challenges, to make sure that in any negotiations here referred to, there are true representatives of the Venezuelan citizens, in order to make sure that differentiation occurs, and that there is no legitimation of debts that do not entirely merit it.

In this respect I hope the Venezuelan National Assembly, by voting, not by some finger-pointing appointments, selects who are going to represent it in any of these negotiations; and then formally notifies all interested parties of their names, that including all officials of the Paris Club.

Clearly those Venezuelan citizens representatives must present no conflicts of interest with either creditors or with those in government that have been involved with the “contracting” of such debt.

PS. What’s “sort of legitimate debt/credit”? That which is legitimate in legal but not in moral terms.

http://unsustainabledebtsustainability.blogspot.ca/2015/10/we-must-not-allow-vulture-funds-to.html

@PerKurowski

Should we not have a serious man to man conversation with our bank regulating chaps at the Basel Committee?

Sir, if you and I were going to design some capital requirements for banks based on the risk of default of borrowers as measured by the credit rating agencies, would we use the default rates those credit ratings generally imply, or would we use the default rates suffered by the banks after the bankers received that credit rating information? I am sure you and I would agree on using the second alternative, since the first really makes no sense as it would imply that bankers do not take notice of the credit ratings, something that with the capital requirements based on these ratings, we are really making sure they do.

If we so then use the default risk for banks after credit rating information, would we also adjust our risk-weights to the fact that those perceived as riskier are charged much higher interest by the banks than those perceived as less risky? I am sure we would definitely consider that important risk mitigation factor and do so, since otherwise we would be perceived as foolishly assuming that all borrowers paid the bank the same interest rate.

But since we now know that our bank regulating chaps at the Basel Committee did nothing of the sort, they just used gross default rates unfiltered by the bankers applying their own credit analysis criteria, and they completely ignored the mitigation of a higher default risk provided by higher interest rates, isn´t it time we call them home so as to have a serious man to man conversation about what they are up to? I mean before they go on to tackle even much bigger problems like counter-cyclicality and systemic risk. I mean so as to inform them about the fact that they, in their own right, are becoming our greatest source of systemic risk.

 

I believe we should. Just consider the mess they did by making the banks stampede after some lousy securities just because these were rated triple-A; and all the small businesses and entrepreneurs who have seen their access to bank credit curtailed or made more expensive just because their odious regulatory discrimination against perceived risk.

A verse of a Swedish Psalm reads: “God, from your house, our refuge, you call us out to a world where many risks await us. As one with your world, you want us to live. God make us daring!”

“God make us daring!” That is indeed a prayer that the members of the Basel Committee do not even begin to understand the need for.

Psalm 288 Text: F Kaan 1968 B G Hallqvist 1970, Music Chartres1784

In sovereign debt should not moral and ethical issues be more important than collective and pari passu clauses?

Sir, Robin Wigglesworth discusses bond legalese, like collective and pari passu clauses, and rightly concludes “paying attention to the legal differences is [especially] important when a borrower runs into a brick wall.” “Venezuelan bond small print piques investors’ interest” June 18.

But we citizens would also appreciate that lenders gave some minimum minimorum considerations to what the funds they loaned out were going to be used for, whether the loans were being correctly and transparently contracted, and of the quality of the managers of the proceeds, the governments.

In many cases, like that of Venezuela, if creditors had done so they could easily have concluded they were giving odious credits, and that the government was contracting odious borrowings; and that they better refrain from giving the loans, no matter how juicy the risk premiums.

In a world were legislation against acts of corruption exists it is surprising how little consideration “connoisseurs” give to the moral and ethical aspects of sovereign debt. Very high interest rate risk premiums, is the currency in which the corrupter and the corrupted too often conclude their dirty dealings.

For instance, in Venezuela, though there are serious scarcities of food and medicines, the government sells petrol domestically for basically nothing; and blocks humanitarian international arguing that to allow it would infringe their sovereign right to have exclusive responsibility for the welfare of citizens. And besides the market is well aware of that there are Venezuelans imprisoned for political reasons.

In such circumstances should not lending to Venezuela qualify as odious credit? Should that not also be qualified as part of odious government borrowings?

Should not citizens have a collective clause rights with which they can authorize or not the payment of odious credits and borrowings?

What should a due diligence process for bond issues which proceeds might help finance human rights violations include?

If a corporation suspect of drug trafficking made a bond issue, who would begin by revising the clauses of its legal documentation?

@PerKurowski ©

Congresswoman Maxine Waters… stop rooting for bank regulations that puts inequality on steroids.

Sir, I refer to Ben McLannahan’s and Barney Jopson’s “Republican puts forward alternative to ‘nightmare’ Dodd-Frank” April 27.

Jeb Hensarling, the chairman of the House financial services committee’s Choice Act includes a provision of requiring banks to hold “at least 10 per cent of gross assets, if they want relief from some of the toughest standards on supervision and regulation”

“Congresswoman Maxine Waters, the top Democrat on the committee, told the hearing that the proposals — known as the Financial Choice Act, which stands for Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs — would unleash more “risky and predatory” practices on Wall Street.”

Holding 10 percent, against all assets, would eliminate that odious discrimination against the access to the opportunities of bank credit of "the risky", which result from the current risk weighted capital requirements for banks.

John Kenneth Galbraith in his “Money: Whence it came where it went” 1975 wrote:

“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Allowing banks to hold less capital against what is perceived as safe than against what is perceived as risky; allows banks to leverage more with what is perceived as safe than with what is perceived as risky; which allows banks to earn higher expected risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived as risky; which means banks will lend more than usual to what is perceived as safe, at even lower rates, which could be very dangerous; and less than usual to what is perceived as risky, unless its done at much higher rates than usual… which unfortunately makes the risky even riskier.

So, as I see it this proposal by Chairman Hensarling should not be applied only to those who want “relief from some of the toughest standards on supervision and regulation” but to all banks.

Of course, I pray that 10% capital requirement applies also to loans to the public sector. As is, lower capital requirements for banks when holding the sovereign’s debts than those of the citizens, de facto implies a belief that government bureaucrats know how to use bank credit better than citizens… and that is of course pure statism, totally false and absolutely unsustainable.

http://subprimeregulations.blogspot.com/2016/03/decreed-inequality.html

@PerKurowski

Odious debts, odious credits and odious regulations are all yin-yang elements of the financial sector

Sir, M Shepherd, when commenting on Alex Pollock's letter "Sovereign debt has a pretty bad record" August 16 writes that “All too often, debates about defaults on government bonds focus on the borrowers and neglect the lenders.” “The other side of the sovereign debt story”August 18.

Absolutely, and that is why when I write about odious public debt, like that contracted in Venezuela, I always follow it up with one about odious public credit, like those awarded to Venezuela.

But, of course I have to add a point. For instance the immensely excessive public debt in Greece would never have happened had regulators not, for the purpose of setting the capital requirements for banks, assigned Greece a zero percent risk weight.

Those regulators have not been held accountable either, among others because of the network solidarity FT has showed them … in fact they have been promoted to central banks… and our banking system still lives under the distorting thumb of risk weights.

@PerKurowski

If a credit from one sovereign to another were classified as a crime against humanity how would the IMF proceed?

Sir, in Venezuela going to the IMF for assistance, is such a hot potato that some might even be hauled in front of a court accused for antipatriotic behavior for even mentioning that possibility. But if at the end it has to go to the IMF, it is clear that Martin Wolf raises an extremely important issue, namely how the influence of some sovereign creditors could block constructive actions by the IMF to reach acceptable solutions. “Resist Russian blackmail over Ukraine’s debt” October 21.

And the same problem, of how to treat sovereign credits, would be present in any Sovereign Debt Restructuring Mechanism. It has no easy solution… and the perfect might well prove to be the enemy of the good.

That said, a sovereign should have the right to go in front of some international court, in order to at least have the chance of getting the debts it owes, including to other sovereigns, classified as derived from odious credit, if for instance there is sufficient proof that substantial corruption was involved when the debt was contracted… and that the creditor had or should have had sufficient knowledge about it.

In the case of the most egregious malfeasance, where it can be sufficiently evidenced that many humans are suffering as a direct consequence of a debt having been contracted, one should be able to have that debt qualified as an economic crime against humanity.

And if a debt owed by a sovereign to a sovereign were to be qualified as resulting from an economic crime against humanity, by for instance the International Criminal Court in Hague, how would then IMF proceed? I really do not know… I am just an economist.

@PerKurowski ©

When will the world stop referring to those giving odious loans, odious credits, as investors?

Sir, the Lex column “Venezuela debt/Maduro: crypto communist” of August 23 writes: “It beggars belief that a country with the world’s largest oil reserves has failed financially…when prices for oil, its sole commodity, fell. Borrowing has filled the gap… Investors, including the asset management arm of Goldman Sachs, can look forward to a lengthy default”

In your editorial of August 22, “The desperate plight of Maduro’s Venezuela” you wrote: “Much of the world, especially supporters of “Chavismo” from the Panglossian left, has been disgracefully silent about Venezuela’s crisis for too long. The country is all but a failed state. As a drug-trafficking hub and the source of a huge exodus, it is already an exporter of instability.”

And I must ask when is the world going to stop referring to those who help finance regimes that are notoriously inept or/and commits awful violation of human rights as “investors”, and not as the lowly and dirty financiers they are?

Is for instance financing the smuggling of drugs more morally reprehensible than financing a regime like Maduro’s? Would you ever dream of introducing to your family and friends one who had helped finance the construction of Auschwitz, as an investor?

Yes, credit ratings might be needed, but more does the world need ethic ratings. It is way past time the world begins to understand that most odious debt there is, has its origin in odious credits, and that we need a Sovereign Debt Restructuring Mechanism that takes that in consideration.

http://unsustainabledebtsustainability.blogspot.com

@PerKurowski