China Won't Save Greece by Buying $35B of Bonds

♠ Posted by Emmanuel in ,,, at 1/28/2010 05:01:00 PM
A few days ago we looked at how internationalized financial difficulties have become by analyzing how the 2004 Greek Olympics have contributed to Greece's Olympian money woes. Well, continuing with the theme of higher, stronger, faster deficits, news outlets are reporting an interesting relationship Greece is purported to have with the holder of the 2008 Olympics--China. Republicans in America have a stock solution for everything that ails of "cut taxes." If I have one, it's "sell it to the Chinese."

Apparently, the Greek authorities may have contemplated this idea in financing its gargantuan pile of debt. The Financial Times reports that while Hellas is reluctant to admit flogging Eur 25 billion ($35 billion) worth of bonds to Beijing via Government Sachs, it certainly doesn't sound far-fetched. What's more, the squelching of this rumour is causing yields on Greek bonds to rise considerably:
The mayhem unfolded after Greece denied it had given a mandate to Goldman Sachs, the US investment bank, to sell government debt to China. Greek 10-year bond yields closed at 6.70 per cent, 0.48 percentage points up on the day. The Financial Times reported on Wednesday that Athens was wooing Beijing to buy up to €25bn of government bonds in a deal promoted by Goldman. China had not yet agreed to such a purchase, the FT said.

The government’s comments unsettled markets because of their implication that China, with $2,400bn in foreign exchange reserves, was not interested in increasing its exposure to sovereign Greek debt. Experts, though, said that heavier Chinese purchases of Greek debt would be no less disturbing. For the eurozone, “a member country implicitly rescued by China would be an even worse signal than an IMF programme,” said Marco Annunziata, chief economist at Unicredit.
Yu Yongding, an astute commentator on China's international financial dealings who Chinese powers-that-be listen to, believes Greek debt is an even worse prospect than American debt, thus negating any "diversification" advantages:
China shouldn’t buy a “large chunk” of Greek government debt to help rescue the nation because the securities are more risky than U.S. Treasuries, said Yu Yongding, a former adviser to the Chinese central bank.

Greece has a lower debt rating than the U.S. and its statistics have been “sharply” criticized by the European Commission, said Yu, currently a member of the Chinese Academy of Social Sciences, a government-backed research body. The Greek Finance Ministry yesterday “categorically“ denied a report in the Financial Times that it is wooing China to buy as much as 25 billion euros ($35 billion) of its bonds. “It is unreasonable for an economist to support a diversification away from an unsafe asset class to a much more unsafe asset class,” Yu said in an e-mailed response to questions. “Let European governments and the European Central Bank rescue Greece.”
I like him pointing out that American debt is unsafe (as if the rest of the world didn't know that already). Despite official protestations about not requiring any help, I believe that any rescue package for Greece will involve the EU despite rhetoric to the contrary. If such were the case, I believe that an IMF-led programme would vouchsafe EU lending anyway. For Star Wars fans, treating Greece as the "Alderaan" of the PIGS (Portugal, Ireland, Greece, and Spain) may be just the thing to get the others to fall in line. Instead of inviting moral hazard (with Spain being the rotating head of the EU at the current time and whatnot), demonstrating "don't make me destroy you" by forcing Greece to the IMF poorhouse if it doesn't behave may be just the ticket to make these deficit-swilling countries behave.

I have a similar idea for well-deservedly humbling America for its fiscal degeneracy that I'll talk about in due time. Where's the rebel base? You sir are the fiscal rebel, and extirpating your prodigal ways is long overdue.