Hidden hazards in China’s role as potential saviour
Flush with trillions of dollars in cash, possible Beijing bailout of a battered Europe carries great risks
William Pesek 29 September 2011
China and the United States finally found something to agree on: Europe is doomed and might take the world’s two biggest economies down with it.
Officials in Beijing and Washington are not actually using the “D word”. They don’t need to, not with Zhou Xiaochuan, the governor of the People’s Bank of China, talking about emerging nations rescuing the euro zone and US Secretary of the Treasury Timothy Geithner warning of “cascading default, bank runs and catastrophic risk” there.
The price tag for keeping the Greek-led turmoil from killing the euro is rising fast. Asians are so anxious about it that they are querying Americans - like me. In my travels around the region this month, I’ve faced a harrowing question: Would US President Barack Obama chip in for a giant European bailout?
It is hard to decide what is more disturbing: the obvious answer - over Republicans’ dead bodies - or the fact it is being asked at all, and by whom. Among those posing it were the finance minister of one Asia’s biggest economies, the central bank governor of another and a number of major executives.
Here is one thing we do know: Keeping Europe together, if it’s even possible, will be monumentally expensive. The International Monetary Fund is supremely out of its league. Its US$384 billion lending chest would barely be enough to save Greece, never mind Spain or Italy. The IMF needs a bailout.
Asia, flush with trillions of dollars of cash, is being cast as the potential saviour of global capitalism. Being thrust into the role of a modern-day J.P. Morgan, the New York financier who restored order amid the Panic of 1907, is what Asia gets for saving for a rainy day. Little did the region know that the storm its currency reserves would be called upon to address would be on another continent.
Asia should be wary. There are at least two ways in which Asia’s potential generosity could end badly. One, developing nations saving the irresponsible lifestyles of rich Westerners elevates the idea of moral hazard to a whole new level. Two, Asia needs its money more than it may realise.
Europe should have encouraged Greece to restructure its debt years ago. Instead, denial and paralysis got the best of politicians considering one bad option after another. They tossed hundreds of billions of euros away with nothing to show for it.
Now that German taxpayers are having fits about providing more to bail out their single currency’s weakest links, Europe is looking East. Zhou finds himself saying it is “too early” to determine how emerging economies can help the euro zone overcome its sovereign-debt crisis. Yet he knows this is a matter of “when”, not “if”. Between them, Brazil, Russia, India and China have US$4.3 trillion of reserves, and Europe, a major trade partner, needs money.
That might calm markets, but it won’t reduce the need for major reforms. Why begin the messy process of creating a fiscal union among 17 members and generating a euro-wide bond issue if Asia’s money can buy time? Giving Europe the scope to again delay economic upgrades won’t do anyone any good.
Asia, meanwhile, should not let its reserves lull it into complacency. The region did a great job of steering around the 2008 financial crisis. Doing it again will be more difficult. Additional fiscal stimulus may run afoul of the credit raters. Unacceptable inflation is another danger.
What’s more, Asia needs its savings to fund priorities such as job creation, education and infrastructure. And then there is poverty. China’s US$3 trillion-plus of reserves creates the illusion that the most populous nation has plenty of money. Yes, it’s a huge sum, but it doesn’t take into consideration how a reprise of 2008 would affect China’s economy.
Maintaining growth of about 10 per cent will require even more stimulus than last time when hundreds of billions of dollars went into public spending. Those debts could go bad if world growth goes into reverse again. China proved it can live for three years with reduced demand from US and European consumers. Staying on a diet for five years or more might be another story.
There is a view that emerging-market bonds are reliable havens. That’s fine for now, but the longer the world goes without expansion from the major economies, the riskier that premise becomes. Without growth in the core, the periphery will suffer.
As Europe crashes, China and Asia may be called upon to back a rescue in the manner of Morgan a century ago. Of course, it’s not as simple as that. Nor is it in the best interests of the global financial system in the long run. There’s something obscene about poor and thrifty countries bailing out richer, profligate ones. And that’s something we can all agree on.
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Hidden hazards in China’s role as potential saviour
Flush with trillions of dollars in cash, possible Beijing bailout of a battered Europe carries great risks
William Pesek
29 September 2011
China and the United States finally found something to agree on: Europe is doomed and might take the world’s two biggest economies down with it.
Officials in Beijing and Washington are not actually using the “D word”. They don’t need to, not with Zhou Xiaochuan, the governor of the People’s Bank of China, talking about emerging nations rescuing the euro zone and US Secretary of the Treasury Timothy Geithner warning of “cascading default, bank runs and catastrophic risk” there.
The price tag for keeping the Greek-led turmoil from killing the euro is rising fast. Asians are so anxious about it that they are querying Americans - like me. In my travels around the region this month, I’ve faced a harrowing question: Would US President Barack Obama chip in for a giant European bailout?
It is hard to decide what is more disturbing: the obvious answer - over Republicans’ dead bodies - or the fact it is being asked at all, and by whom. Among those posing it were the finance minister of one Asia’s biggest economies, the central bank governor of another and a number of major executives.
Here is one thing we do know: Keeping Europe together, if it’s even possible, will be monumentally expensive. The International Monetary Fund is supremely out of its league. Its US$384 billion lending chest would barely be enough to save Greece, never mind Spain or Italy. The IMF needs a bailout.
Asia, flush with trillions of dollars of cash, is being cast as the potential saviour of global capitalism. Being thrust into the role of a modern-day J.P. Morgan, the New York financier who restored order amid the Panic of 1907, is what Asia gets for saving for a rainy day. Little did the region know that the storm its currency reserves would be called upon to address would be on another continent.
Asia should be wary. There are at least two ways in which Asia’s potential generosity could end badly. One, developing nations saving the irresponsible lifestyles of rich Westerners elevates the idea of moral hazard to a whole new level. Two, Asia needs its money more than it may realise.
Europe should have encouraged Greece to restructure its debt years ago. Instead, denial and paralysis got the best of politicians considering one bad option after another. They tossed hundreds of billions of euros away with nothing to show for it.
Now that German taxpayers are having fits about providing more to bail out their single currency’s weakest links, Europe is looking East. Zhou finds himself saying it is “too early” to determine how emerging economies can help the euro zone overcome its sovereign-debt crisis. Yet he knows this is a matter of “when”, not “if”. Between them, Brazil, Russia, India and China have US$4.3 trillion of reserves, and Europe, a major trade partner, needs money.
That might calm markets, but it won’t reduce the need for major reforms. Why begin the messy process of creating a fiscal union among 17 members and generating a euro-wide bond issue if Asia’s money can buy time? Giving Europe the scope to again delay economic upgrades won’t do anyone any good.
Asia, meanwhile, should not let its reserves lull it into complacency. The region did a great job of steering around the 2008 financial crisis. Doing it again will be more difficult. Additional fiscal stimulus may run afoul of the credit raters. Unacceptable inflation is another danger.
What’s more, Asia needs its savings to fund priorities such as job creation, education and infrastructure. And then there is poverty. China’s US$3 trillion-plus of reserves creates the illusion that the most populous nation has plenty of money. Yes, it’s a huge sum, but it doesn’t take into consideration how a reprise of 2008 would affect China’s economy.
Maintaining growth of about 10 per cent will require even more stimulus than last time when hundreds of billions of dollars went into public spending. Those debts could go bad if world growth goes into reverse again. China proved it can live for three years with reduced demand from US and European consumers. Staying on a diet for five years or more might be another story.
There is a view that emerging-market bonds are reliable havens. That’s fine for now, but the longer the world goes without expansion from the major economies, the riskier that premise becomes. Without growth in the core, the periphery will suffer.
As Europe crashes, China and Asia may be called upon to back a rescue in the manner of Morgan a century ago. Of course, it’s not as simple as that. Nor is it in the best interests of the global financial system in the long run. There’s something obscene about poor and thrifty countries bailing out richer, profligate ones. And that’s something we can all agree on.
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