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Tuesday, January 24, 2012

Mr. Ackermann's split views

In an interview with CNBC on October 14, 2011, I heard Mr. Ackermann say the following: "Measures must be taken that sovereign loans are made risk-free again, which is what they should be!"

In recent days, Mr. Ackermann was quoted in various newspapers saying the following: "The expectation todate was that sovereign debt would be repaid 100%. This principle has now been violated and this against all previous public pronouncements to the contrary. We will pay a high price for that in the future!"

Does Mr. Ackermann not understand that there is a world of difference between these two statements? "Risk-free" means what is says, namely: I buy a financial asset which carries zero risk as regards punctual payment of principal and interest. "Repaying debt at 100%" simply means that the borrower will never request a haircut or repudiate its debt. It does not explicitly mean that the debt will be paid punctually (sovereign debt is hardly ever "repaid"; it normally gets refinanced).

Financial history of only the last 100 years is full of precedents that sovereign loans are not risk-free (i. e. whenever sovereign debt was rescheduled). If Basel-II stipulated a different treatment in the books of banks, it means that the creators of that rule did not know financial history. Today, we know that this was one of the more costly mistakes in financial history.

On the other hand, the principle of repaying sovereign debt 100% has been violated only very infrequently in the last 100 years (i. e. whenever sovereign debt was forgiven). To my knowledge, this happened only in situations where either one-time devastations had occurred (Germany after WWII) or a country had indeed hit extreme poverty.

To depart from the latter principle in the case of a first world country (and any EU-member must be considered as a first world country!) after only a few years of crisis is a precedent whose long-term consequences on financial markets cannot yet be assessed! The same goes for continued unkept promises by financial and political officials as regards sovereign debt. Principle & precedent are among the most important features when it comes to confidence. In the last two years they have been trampled on!

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