BRUSSELS (MNI) – The European Parliament will seek amendments to
proposed EU capital rules in order to abolish the zero-risk weighting
that banks assign to government bonds, the head of the parliament’s
Economic and Monetary Affairs Committee said Friday in Brussels.

“The Greek situation has clearly shown that not all euro area
government bonds are equal,” Sharon Bowles told a government bond
conference. “Treating all bonds denominated in the same currency as
equal doesn’t make sense and actually creates a perverse incentive to
hold riskier, higher yielding bonds.”

Raising the risk weighting assigned to the bonds of governments
that violate EU economic discipline rules could more effectively
discipline such countries than the threat of a fine, she said.

“It is the intention of many of us now to address this point,” the
committee chairwoman said.

“Andrea Enria of the EBA is among the growing band of those
converted to the idea that it must be tackled, so the question now is
more of when to implement, and how, bearing in mind the procyclical
effect it would have at the moment,” Bowles said.

“A large exposure regime might be one way that is an alternative to
changing risk weighting, and of course we could also involve the
European Systemic Risk Board,” she said.

Bowles, a UK Liberal Democrat from the South East of England,
criticized EU leaders’ response to the crisis as “too little, too
uncertain, too late,” and she said that Eurozone governments’ insistence
on a AAA rating for the EFSF was “tantamount to a reverse leverage.”

“Fretting about the cost difference between AAA and AA while
slapping on the punitive 3% interest charge seemed bizarre to say the
least. The other absurdity was to require unanimity in the decision
making process,” she said.

Bowles warned that the Eurozone is living on “borrowed time.”

“What does this mean when AAA France has 50 year CDS at 187bp and
BB Phillipines is only 190, A- Malaysia is 149, while Spain is 380 and
Italy 452?” she asked.

“So at present many think it is safer to be at risk of a tsunami
than to be in the Eurozone. Maybe that is right – EU leaders have missed
all the sovereign tsunami early warnings – now the flood defences must
be made high enough to stop engulfment and devastation.”

–Brussels bureau: +324-9522-8374; pkoh@marketnews.com

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