Sunday, December 2, 2012

One of the greatest myths is that if Greece had collected all taxes, Greece would not have been in trouble.

Greece is not in trouble because of the taxes it did not collect Greece is in trouble because its government squandered away funds it borrowed. And because the Greek government was able to borrow so much, thanks to the loony bank regulations. 

For instance, if a German bank wanted to lend to a German entrepreneur, according to Basel II it needed to hold 8 percent in capital, which meant it could leverage its capital 12.5 to 1 times, but, if it lent to Greece, the way Greece was rated at the time, it only had to hold 1.6 percent in capital, which meant it could leverage its capital a mind-boggling 62.5 times to 1. No unregulated or shadow bank would ever manage to do that. 

And that meant, sort of, that if the bank could earn a risk and transaction cost adjusted margin of 1 percent when lending to a German small entrepreneur, it could expect to earn 12.5 percent on its capital, but, if it expected to earn the same margin lending to Greece, it could earn a whopping 62.5 percent on its equity per year. And that is of course a temptation that not even the most disciplined Prussian would be able to resist. And of course what Greek (and many not Greek) politician can resist the temptation of abundant and cheap loans? 

And so had all Greeks paid all their taxes that would have made no difference, in fact, since the Greek government could then have been able to show greater fiscal income, it could have justified keeping credit ratings great for a longer time, which meant having taken on even bigger debts.

Or did the Greek politicians think the loans Greece took on would be repaid by them being able to make of the Greeks exemplary tax–paying-citizens in just some few years? If they did, then they are more stupid than any ordinary politicians.

And now what? Yes Greeks, pay your taxes! But of course only after Greece creditors have accepted a reasonable deal based on a very substantial haircut, and only after you are sure your government will not keep squandering away your taxes.

It is of course very understandable that many Greeks are mad at those who have not paid their taxes but, let’s face it, on the other hand, the way things have turned out, those taxes that were not paid in earlier, might come in very handy now, and will, hopefully, we pray, be put to a much better use.

PS. This post was made before I realized that reality was even much worse because, instead of applying to Greece the 20% risk weights Basel II ordered, EU authorities assigned Greece a 0% risk weight and so European banks, when lending to Greece, did not have to hold any capital at all. Now how crazy is that?

PS. At the end of the day the EU authorities kept total silence about their mistake and blamed Greece for it all. What a sad European Union L