Saturday, 15 October 2011

US loses patience with the Eurocrats

The headlines in today's business pages make it clear the US wants action from the Eurozone over its long running Greek debt Eurozone crisis. Its not just the US but also the German banks that want action. The latter arises as the Basle capital adequacy rules assign zero risk weight to any Eurozone sovereign bonds held by Eurozone banks. It is obvious nonsense to assign the same risk free weight to German and Greek bonds but in the calculation of a bank's capital adequacy that is what currently happens.

Bankers know this and that is why they are unhappy about lending to other banks on the unsecured inter-bank market. It is a cardinal rule of banking that if you think there is the slightest risk you will not be repaid then don't lend. That is why the interbank market is virtually closed. To put it in a metaphor some UKIP MEPs will understand its like going into a brothel and not knowing which of the girls, or boys, have nasty sexually transmitted diseases that you wish to avoid contracting. As an old Scottish doctor said to me the only way to be sure in these circumstances is don't go there or as a banker don't lend on the inter-bank market.

There are ways around it. Banks can lend on the inter-bank repo market but this requires sovereign debt transfers as loan collateral. The collateral you would most likely be offered is BTPs, Italian government debt which is less than reassuring to the Anglo Saxons and also the Germans and French.

The relationship between bank lending and sovereign debt is thus the most crucial in finance.

After Lehman in 2008 we had a banking crisis with lots of banks with dodgy mortgage backed securities on their balance sheets to which even today they have not owned up to but the sovereign bond core was solid. Now our Eurozone friends have added sovereign debt risk on top! No wonder the Yanks are unhappy. They have made it clear the Sarky Merkel proposal of expanding the IMF balance sheet is a non-starter and they own the IMF despite the fragrant Frogette MD.

The problem is who pays for this Eurozone cock up. Sarky and his fellow travellers want some one else to pay. The US are having none of it. To repeat and parody what I was told many years ago by an EU DG, its a European problem and requires a European solution but of course that was if no payment was involved. Now there is the latest idea is to make the bond holders pay by taking a 'haircut'. That is what we Anglo Saxons unhelpfully call a default.

Next up is the EU pays but it does not have any money so it wants Sarky to pay. Sacre bleu! Do these fools not realise France is in the EU to take money out not put it in.

I have no idea what the EU will come up with at the G20 but it better be good!


John Page said...

Great piece, well written! :)

Anonymous said...

Who gives a shit what the Americans say, I suspect there's one less that gives a fuck what the EU says.