Greece, greed and a Capital Markets Union bust

How the Greek negotiation could doom the CMU even before it has been effectively born.

The EC has launched a very ambitious initiative with the Capital Markets Union. The CMU is directed towards improving access to financing as well as efficiency in the markets. Ideally, it would allocate effortlessly resources across borders from those with surplus of savings to any investment opportunities, mostly in SMEs. It is a disintermediation from the banking system, where technology will also have its role to make it work. Everybody greets the idea.

What does it have to do with Greece after all? Well, Greece has a financial problem, no matter how we want to put it. As the NY Times pointed out in a brilliant piece, some funds holding Greek bonds are maneuvering to achieve great gains in all this turmoil. And its main argument is a very compelling one: that Greek debt is not properly accounted for, but just vastly overstated at such high figures for political leverage, home and abroad creditors’ countries. Of course they say it because they have billions of profits at stake.

But what if they are somewhat right after all? That would be a blow to the credibility of any CMU initiative. Lack of transparency and asymmetry of information are not the best building blocks for any new market, least a markets union. The cautionary tale from the Greek case is that from what we can see, it seems that figures could be used for the convenience of just the lenders, not both parties in a lending contract. Accuracy and accountability would be subsidiary of the main objective: getting back the nominal value of what was lend, no matter what happens.

In such a market risk is not symmetrically treated. Lenders have political leverage and backing, so even when, as a borrower, you are already paying a risk premium, in fact that premium becomes just an extractive rent. Lenders are not at such a risk at all. They will get their money for sure one way or another. Borrowers are paying a useless premium over money price because they will always burden the debt: lenders have States, Eurogroup and the EC to back them when things go south. There is a clear borrowers’ lack of certainty about to which extend risk is actually shared with the lender, since prices as a signal are distorted.

So any incentive to using the CMU is nihil. Why bother submission to all those uncertainties? For any borrower, it is safer to ask for money to a local financial entity, preferably a systemic one, so when you do it you are in fact spreading your risk across all your fellow citizens. So if things go south, taxes and your Member State are de facto backing your credit. If you ask for money directly to our fellow Germans or any Northern bond-holder in the CMU, you are on your own. And as Greece example shows, that’s a very scary prospect.

Furthermore, the “techfin” concept as well as the disclosure of information is biased to the benefit of the lenders, not the borrowers. Massive data profiling of SMEs in the CMU would lock most of them in the herdonomics loop. And we will need again public backing from the financial instruments or EU Funds tools to make things roll again.

So Greece and its debt negotiation, after all, it is very important not just for the sake of our fellow Greeks, but for the future of initiatives such as the CMU.