Basel is just a mutual admiration club of firefighters seeking to avoid a crisis

Published in FT November 18, 2004 The link is gone!

Sir, If a citizen from a developed country wishes to obtain finance from his local bank to buy a pricey retirement home in his local overheated market, then Basel poses no problem.

But should he want to buy a much more affordable home in a developing country and have his bank finance him, then Basel slaps such capital reserve requirements on the bank as to make it an impossibly onerous proposition.

This is just one way by which our bank supervisors in Basel are unwittingly controlling the capital flows in the world.

We also wonder in how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.

Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters trying to avoid bank crisis at any cost - even at the cost of growth.

Odious Credit

I recently wrote about odious foreign public debt, that debt about which there is a current debate in the world as to whether it can be legally repudiated if it is taken on by illegitimate governments or for illegitimate ends. The other side of the coin is odious credit. Please don’t think I’m against banks—quite the opposite. But I respect the role of the financial middlemen too highly to keep quiet when they are not doing their job right. In 1981, the representative of a foreign bank in Venezuela showed me a letter in which his boss instructed him to “give credit to the INAVI, Venezuela’s National Housing Institute. It’s the worst public institution, which means that it pays us the highest rate and, as you know, in the end it’s just as public as the best of them and Venezuela will have to pay up just the same.” Odious credit, isn’t it?

The first thing a good banker should ask a client applying for a loan is what is it for and if the answer is not satisfactory he should reject the application, regardless of the guarantees offered. Simple plain-vanilla fraud of the Parmalat kind will always exist, but the asinine way all their creditors fell into the trap makes one suspect that this is only the first case of systemic risk in the banking system: tempted by the regulators in Basel, banks subordinate their own criteria to those dictated by auditors and credit raters. This development, bad in itself, is even more serious in the case of public credit, where the what it’s for is being replaced by how much can be carried, perversely derived by calculating the level of sustainable public debt.

When I call for the total elimination of foreign public debt (which is feasible and would not require huge sacrifices in an oil rich land like Venezuela) my colleagues often argue that a certain level of debt is good and necessary for the country. This does not convince me, since it makes debt sound like electricity that must be kept at a certain voltage. Because public debt must always be paid back, regardless of whether anybody ever knew what or whom it was for, I’m fighting for the day when the private sector in Venezuela can return to the markets, freely, without having to carry that huge monkey—foreign public debt—on its back.

In my opinion, the Benemérito (the dictator Juan Vicente Gómez (1864–1935) who ruled the country between 1908 and 1935) deserved great credit for ridding Venezuela of her foreign debts He certainly knew that to shake off that vice more than patches or pieces of chewing gum are needed.

From El Universal, Caracas, April 22, 2004

Odious Debt

One of my recent articles, which focused on the need to protect the environment, concluded by recalling the ancient proverb, “We have not inherited the world from our parents; we have borrowed it from our children.” On that occasion, as always, I thought about Venezuela and I knew that, as borrowers from our children, we have acted like veritable pigs. Not only have we extracted our country’s oil without putting it to much good use, we’ve even mortgaged its future in the process.

Some countries may be in need of foreign loans to get on their feet, but here in Venezuela we ought to know by now that our foreign public debt, be it the debt of yesterday, today, or tomorrow, only serves to fasten us all the more securely to a sinking ship. Foreign public debt is a monstrous obstacle. It keeps our citizens from getting loans (or at least makes loans much more expensive) that could indeed lead to growth in the country and allow the government to satisfy social needs through taxation.

Our only salvation is to learn how to resist the lure of the eternal sirens’ song, which goes “foreign debt taken on by the previous administrations is evil and good for nothing, but rest assured, with us, everything’s going to be different.” How do we—like the ancient Odysseus—tie ourselves to the mast?

There are those, in similar desperation, who argue that since our creditors were accomplices of those administrations, we shouldn’t pay our debts to them. I accept the theory of complicity, at least on the part of the intermediaries, but I think we should punish them much more harshly, by canceling the entire debt and never again taking out another loan.

What can ordinary citizens do who want to and have to go about their daily lives and can’t be continually overseeing the government? The same as any company: they can refuse to provide their management with authorization for contracting debts. Along these lines, a doctrine is now being discussed in the world according to which, if the debt was contracted by an illegitimate government, or for uses that were clearly of no benefit to the country said debt could be declared odious and, as such, would not be legally demandable.

Dear friends, if we are going to do right by our children, our grandchildren, and our great grandchildren, and return the country we borrowed from them in good shape, maybe we should take advantage of such a possibility and declare our foreign public debt eternally odious. Given that threat: Would creditors dare provide us with loans? What would the credit-rating agencies say? Or let us be even more clear about the message and amend our constitution to say that the government of Venezuela has no authority to borrow from foreign sources, that any attempt to do so is illegal, and hence that all such illegal debts will not be repaid. That should stop foreigners from lending us money!

From El Universal, Caracas, March 25, 2004