The eurozone village

Warren Mosler tries to guess how a typical eurozone banker might react to the call to buy their own country debt and seems to go with the usual mental picture people have of a market, that of a crowd of anonymous agents each operating more or less rationally in a large system they don’t control.

The thing is the banking sector is highly concentrated, and even more so within the eurozone if you consider the tight links between each country’s government and its locally registered bankers. Each eurozone country has three or four, or fewer for smaller countries, systemically important major banks, so it’s a very small “market” indeed. The elites of European countries tend to be tightly knit and most people within the top of the political and business trees know each other, having navigated within the same circles and been educated in a handful of institutions. The social rules of such a network are more likely to be like that of a village than that of an anonymous modern city.

To give an illustration, here’s a picture of a vehicle large enough to hold all the important decision makers on the Italian sovereign bond market, that is: the Italian prime minister, the heads of Unicredito and Intesa Sanpaolo. There’s a spare seat for a representative of the minor banks, if they care to invite one.

The market for Italian sovereign bonds fits therein

This is true of the whole eurozone, each major country has two to four systemic banks, and the minor countries fewer. About 20 banks are 95%+ of the banking sector. So the entire market for eurozone sovereign debt would fit in such a vehicle:

A spacious transport for all the decision makers in the eurozone sovereign debt market

Besides, to some extend it could be said that in highly regulated environments, systemically important banks are more akin to joint ventures between their government and the private shareholders than truly independent institutions (the government sets operational parameters via regulation and guarantees deposits, the private sector provide capital and oversees managers) even if governments have been reluctant to use their power explicitly in recent times. Now that most banks are weak and have a low market capitalisation by historical standards, a systemic role, and an angry public opinion, it would be relatively cheap, and politically expedient, to take an actual controlling share and nationalise them.

So it is likely that most heads of banks will above all want to keep their job and maintain the formal private sector status of their institution, which is well away from what the manager of a non-systemic hedge fund would do.

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