Why is a forced debt reduction considered a “haircut”, while having to pay more taxes, accept inflation or negative interests is not?

Intro: If I am a European and have invested my savings in a bond issued by my sovereign, and then my sovereign cannot repay me without increasing the taxes on me, or printing the money that by means of inflation allows it to repay me with money worth less… is that not a slighted disguised but yet a very real haircut? 

Current bank regulators require banks to have much less equity when lending to the government than when lending to a small businesses or an entrepreneur. 

And we must presume that means regulators feel it is less risky to us citizens when banks lend to the government, and the use of that money is decided by bureaucrats, than when the spending of the money they are responsible for is decided by small businesses or entrepreneurs. 

I don’t get it. Do you?

Might that be because governments are less risky because they have the power to tax or to print money?

If so, why do regulators not explain to us how repaying by having to collect more taxes, or repaying through inflation, is de facto not quite similar to any regular “haircut”.

Really? Is a sovereign less risky because if it cannot repay its debt it can always tax some debt holders and other innocent bystanders more?

Really? Is a sovereign less risky because if it cannot repay its debt it can always print more money and repay you with money worth less?

Friends, are these bank regulators truly working for us citizens, or are they only working for government bureaucrats? Or is it only all about ideology?

PS. When credit rating agencies rate sovereigns, should they not realize that increased taxes and printing money inflation are de facto haircuts?

PS. If I purchase a 10-year US government bond paying 1.97%, and the Fed tells me it is pursuing a 2% inflation… is this a prepaid haircut?

PS. Should banks, insurance companies or pension funds be allowed to invest in bonds with negative interest.... meaning pre-announced prepaid minimum haircuts?

PS. Can somebody please raise some prices, so to make central bankers happy and get deflation out of their heads, and so that they allow us being paid at least some interest on our savings, when we , almost widows and orphans, save in something that is supposed to be safe?  

PS. And the above does not even touch on the haircuts provided by devaluations.

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 much worse. Instead of applying to Greece the risk weights dependent on credit ratings that Basel II ordered, EU authorities assigned to all Eurozone sovereigns' debts, including Greece's a 0% risk weight, this even when none of theses nations can print the euro. So European banks, when lending to Greece, did/do 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

Greece, a great referendum… one more!

Of course the timing is lousy, but I believe the referendum proposed by Greek Prime Minister George Papandreou to be the absolutely correct thing to do… better late than never. The bail-out deal offered to Greece can only be successful if it can count with the legitimacy of the full approval of the Greeks, otherwise not even a 90 percent haircut could be enough. On the contrary, not doing the referendum would, de-facto, mean giving in to those who are opposing the current bail-out agreement. Should they vote yes or no? That is entirely for them to decide.

By the way, I would also like to see a referendum in Greece, and in the rest of Europe, regarding whether to keep in their posts, or fire without any sort of letter of recommendation, all those bank regulators in the Basel Committee who allowed the European banks to lend to a Greece, Italy, Portugal… against only 1.6 percent in capital, meaning authorizing the banks to leverage their equity over 60 times when lending to the politicians of these sovereigns…