Sovereign Debt Exemption To Volcker Is A Scam

Oh c’mon….

U.S. banking regulators are exploring whether they can exempt sovereign debt from the Dodd-Frank ban on proprietary trading after foreign governments complained that the rule could raise borrowing costs and impede the flow of capital, a person familiar with the talks said.

Five regulatory agencies are taking public comments on a proposed version of the so-called Volcker rule, which was included in the 2010 financial regulatory overhaul to ban deposit-taking banks from trading with their own money.

The reason for the squawking is that the rule does not bar this trading for United States debt.

Well, it should.  Banks should not be able to trade (“speculate”) on any sovereign credit — or any other sort of credit at all!  There should be no exemptions, not more exemptions.

While foreign government bonds would fall under the rule as proposed, U.S. government debt would be exempt. Officials from Canada, Japan, and the United Kingdom have sent letters to the Treasury Department and regulators saying the measure would harm their ability to raise money.

“It will be difficult for regulators to ignore a sizable number of the G-20 countries, which will all be saying something similar — which is the Volcker rule’s extraterritorial reach will hinder these countries’ sovereign debt markets,” said Douglas Landy, a Washington partner in law firm Allen & Overy LLP who represents Canadian banks.

There’s no problem with raising money if the offered security is correctly priced.  What’s being squawked about is a decrease in the ability to hawk things and play games in the market, thereby depressing the coupon that sovereigns have to pay and as such enabling irresponsible deficit spending.

The amount of “offered” debt in the markets for a sovereign, absent exigent circumstance (e.g. war) should be zero!  Governments must see the light on this as there’s no other way out of the mess we’re in — you can only spend on services what you can tax from the citizens — period!

Of course this “distresses” various nations, including ours.  My view is that this is just too damn bad, but you can bet the screaming harpies will find some way to blunt the impact of what was a perfectly-reasonably (and in fact nowhere near stringent enough!) addition to the “rulebook.”

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