Reading, little by little, Adam Tooze’s “Crashed: How a Decade of Financial Crises Changed the World” 2018
Chapter 14 “Greece 2010: Extend and pretend”
I read: “As recently as 2007 Greece’s bonds had traded at virtually the same yield as Gemany’s”
The credit rating of Greece in 2007 was A, and that of Germany AAA. According to Basel II’s risk weighted capital requirements Greece should have a risk weight of 20% while Germany 0%.
But, European authorities extended Sovereign Debt Privileges to all Eurozone nations, and assigned Greece also risk weight of 0%. All this even though these nations are all taking on debt in a currency that de facto is not their own printable one.
When Greece’s crisis breaks lose Greece has still a risk weight of 0%... meaning European banks could lend to Greece against no capital at all... and it is still 0% risk weighted.
How is Greece going to extract itself from that corner into which it has been painted is anybody's guess. And extract itself it must, as must all nations. A 0% risk weight for the sovereign and 100% for the citizens is an unsustainable statist proposition.
It all makes me wonder how Tooze would have written this chapter had he considered this. Perhaps he could have been closer to opine this?
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