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In 1988 one year before the Berlin Wall fell another wall was constructed, one which separated sovereign and private bank borrowings.

Thursday, August 15, 2019 19:25

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Sir, I refer to Ben Hall’s “State ownership back in vogue 30 years after fall of Berlin Wall” August 15.

The only real competitive advantage those in favor of SOEs can argue, is that governments usually have cheaper access to credit, so why put it in the hands of private investors who need to expect higher returns.

But in 1988 by means of the Basel Accord 1988 the risk weighted bank capital requirements were adopted. With these banks were allowed to hold sovereign debt against much less, sometimes even zero capital, than what these had to hold against loans to the private sector. As a result the interest rate differences between private and public debt started to grow and with it, the SOE’s competitive advantage, and so we should not be too surprised about these being “back in vogue”.

To illustrate my point just let me ask: Sir, where would the interest rates now be for the 0% risk weighted sovereign Italy, this even though it takes on debt not denominated in a domestic printable currency be, if Italian banks needed to hold as much capital against these as what they must hold against loans to Italian entrepreneurs?

PS. Here my letter to the Financial Stability Board

PS. Here my recent letter to the IMF

@PerKurowski

Source: http://teawithft.blogspot.com/2019/08/in-1988-one-year-before-berlin-wall.html

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