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alex yesikov

Governments Are The Primary Creators Of Systemic Risk - Charles Kadlec - Community of L... - 2 views

blogs.forbes.com/...mary-creators-of-systemic-risk

Greece Systemic Risk Blog Resession Euro

shared by alex yesikov on 30 May 11 - No Cached
  • The greatest lesson of the still young 21st century is proving to be that governments are the primary source of systemic risk to the economy, our standard of living, and our liberty.
  • The latest case in point is the European government debt crisis, with Greece once again running out of money and threatening to trigger yet another financial crisis.  The government’s debt now totals more than 150% of its GDP, and continues to grow.  Last year’s bailout by other European governments was supposed to give it the time needed to reduce its budget deficits so that next year Greece could roll over its maturing debts, as well as finance additional deficits at interest rates under 6%. However, the government’s austerity plan of tax increases and budget cuts has not reduced current or projected government deficits because the economy in 2010 contracted by 4.5% and the unemployment rate jumped to 15%.
  • Normally, this would be a matter between a debtor and its creditors. However, European Central Bank (ECB) Executive Board Member Juergen Stark warns that the effects of restructuring “could overshadow the effects of the Lehman bankruptcy,” which is associated with the beginning of the 2008 financial crisis.
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  • In the case of Greece, government actions and regulations also lie at the heart of what threatens to be a European financial crisis.
  • This risk is amplified by special rules created by politicians that encourage banks to lend freely to governments.
  • Here’s how it works. Governments require banks to hold capital against the loans that they make, anticipating that in the normal course of business, some of the loans will not be repaid.  The riskier the loan, the more capital that needs to be held in reserve. However, under international rules negotiated by government representatives through the Bank for International Settlements (BIS), government loans fit into a special category that has a 0% risk requirement.  That means European banks do not have to hold any reserves against loans they make to European governments.  That’s right, politicians implicitly promised banks that governments would never default.  And, given the opportunity to make “risk free” loans that require no capital commitment, bankers purchased mountains of government debt.
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