Q: what’s worse than being rescued than the IMF? A: China refusing to rescue you

Poor old Europe: it just goes from bad to worse. Already sore from being brutally sidelined during the Copenhagen summit last year, it now faces this addition of insult to injury:

Greece is wooing China to buy up to €25bn of government bonds, a move that underlines Beijing’s increasing financial power, as Athens struggles to fund soaring public debt. Goldman Sachs, the US investment bank, had been promoting a Greek bond sale to Beijing and the State Administration of Foreign Exchange (Safe), which manages China’s $2,400bn foreign exchange reserves, said people familiar with the issue.

That’s what the FT reported yesterday, and the news immediately set pulses racing in Brussels and Frankfurt.  As Unicredit’s chief economist put it to the FT a day later,

For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme”.

But even worse, China then signalled they probably didn’t want Greece’s ropey debt anyway. Yu Yongding – who’s not only a senior member of the Chinese Academy of Social Sciences but was also a member of the Canadian-run L20 project back in the day (and hence a sort of Chinese government-licensed public intellectual on global affairs) – commented yesterday that,

It is unreasonable for an economist to support a diversification away from an unsafe asset class to a much more unsafe asset class. Let European governments and the European Central Bank rescue Greece.

Cue predictable carnage as the markets digested this news: stocks immediately fell 4%, according to the WSJ, and bond investors demanded a record spread of 3.70% between Greek 10 year bonds and the benchmark 10 year German bonds. But the events of the past couple of days are also an interesting little microcosm of larger issues, some of which are these.

– First, of course, it’s the latest example of a case where Beijing gets cast as potential saviour of the world, but proves unwilling to step onto the stage (c.f. Chinese reluctance to get stuck in on curtailing Iranian or North Korean nuclear ambitions; lead developing world emission reductions; keep buying US Treasuries but reduce its export surplus; etc.) But, as David Pilling notes in a useful overview, China just doesn’t see it that way.

– Secondly, this week’s events flag up – again – the euro’s enduring contradiction of having monetary policy centralised at the ECB while fiscal policy is left up to individual countries. Before the credit crunch, there was the problem of countries like Spain and Ireland overheating (shortly prior to crashing back to earth, as it turned out), even as other eurozone members huffed and puffed to scrape a few growth points together. Now, with Greece’s lack of transparency and credibility in public accounts, the immediate problem is different, but the underlying contradiction remains the same.  See Larry Elliott in yesterday’s Guardian for more on this.

– And finally, on a related point, note the underying battle underway here between the dollar and the euro. The US economy doesn’t look great: since 2000, the dollar’s lost 41% against the euro, what with near-zero rates, huge deficits, quantitative easing, and ongoing weak housing and employment data.  But as Greece underlines and the WSJ’s Liam Denning observes, “Europe is no beauty either”.

PS. fellow Brits – now that our quantitative easing party’s over and the lights have come up, we might be wise to go easy on the sneering at Greece until we see how our next couple of bond auctions go…