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. Continue reading

The next reserve currency

Last week’s G8 saw more rumblings of dissatisfaction from China about the US dollar’s continuing role as the world’s reserve currency: State Councillor Dai Bingguo said in a statement to the G8+5 that,

We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies’ exchange rates and promote a diversified and rational international reserve currency system.

This is the latest in a series of such statements from China, building on Wen Jiabao saying he was “worried” about China’s stash of US T-bills in March, central bank governor Zhou Xiaochuan‘s essay on reform of the international monetary system a couple of weeks later, and then China’s $120bn contribution to an Asian emergency currency pool in May – potentially an important step towards an “Asian IMF”.

So if / when the dollar does lose its perch as the world’s reserve currency – something that isn’t likely to happen in the short term, admittedly – then what are the candidates to replace it? Continue reading