EURO INSANITY: EFSF Considers Issuing CNY-Denominated Bonds29 October, 2011, 18:02. Posted by Zarathustra
Tags: Economy, EFSF, Euro Crisis, Europe
This is a news that you wouldn’t really know whether to cry and laugh.
EFSF’s boss Klaus Regling was in China, trying to lure Beijing into bailout Europe. By itself this is absurd on a number of levels. First and foremost, Europe is a richer place than China. Second, still too many people are confused by the size of Chinese foreign exchange reserve, believing that it is a manifestation of wealth and, more mysteriously, sovereign prestige, perhaps. As one BBC report bizarrely opens with the sentences “With some $3.2 trillion (£2tn) in its foreign reserves coffers, China may well be a natural contributor to the eurozone’s bailout fund. But the fact that China is a wealthy country, and therefore able to help, does not explain why China would actually want to do so.”
Whatever, as pointed out here early on, any sizeable contribution from China in bailing out Europe does not help Europe, but it helps China itself by providing capital to support the Euro, which in turn means helping Chinese exports to Europe. There is absolutely nothing particularly good about this from European’s point of view, as Michael Pettis points out in the video within that BBC report that opens with a somewhat humourous line.
But the Europeans seem desperate to a point that they are coming up with solutions that no longer make any sense, and they are embracing ideas that actually won’t help them in the longer term. In the latest roadshow, according to Reuters, the EFSF chief came up with the even more absurd idea of having the EFSF to issue bonds denominated in Chinese Yuan. Yes, you hear that correctly, in renminbi:
Regling, chief executive of the EFSF, said the fund could sell bonds in yuan in future if Beijing so desired. But he said that would be difficult to pull off right now.
So that the Chinese will have no exchange rate risk in buying your bonds? That is just absurd, this is absolutely bizarre. Just as everyone in the developed world wants to see Chinese Yuan to appreciate, the Europeans want to borrow money in Chinese Yuan to bail out themselves, that’s a very good asset-liability management (sarcasm). Of course, as pointed out earlier, for the most of the time Chinese Yuan has only appreciated against the US dollar, not Euro, so that could be fine. Or if they believe in my thesis that if Chinese economy is facing a hard landing, Chinese Yuan could actually depreciate, then that could be a very good deal for the European.
But for the moment, it is just silly.