China to the Rescue! Wen Offers to Buy Greek Bonds

Subtitle:

“Ticker Tape Parade for Trojan Horse”

Ordinarily China’s policy of driving exports to a nation with purchases of their currency is met with resistance. The US, for example,
has been chastising nations buying $US, like Japan and China, calling them currency manipulators, outlaws, etc. But China is getting very clever about it, here coming into the euro zone and buying Greek debt as the savior, and possibly even negotiating informal guarantees of repayment or other forms of support from the ECB, to keep the Greek debt off of the ECB’s balance sheet.

In any case, with Chinese buying, the euro zone is finding support for their funding issues, even as this ‘solution’ further drives up the euro and threatens to put a damper on their exports.

As previously discussed, the euro zone’s export driven model lacks the critical ingredient of being able to buy the currencies of the regions to which they wish to export.

All not to forget that imports are real benefits and exports real costs. So what we are seeing is a battle for export markets between nations who haven’t mastered the elementary art of supporting domestic demand and optimizing real terms of trade.

China to the Rescue! Wen Offers to Buy Greek Bonds

October 3 (Reuters) — China offered on Saturday to buy Greek government bonds in a show of support for the country whose debt burden triggered a crisis for the euro zone and required an international bailout.

Premier Wen Jiabao made the offer at the start of a two-day visit to the crisis-hit country where he says he expects to expand ties in all areas.

“With its foreign exchange reserve, China has already bought and is holding Greek bonds and will keep a positive stance in participating and buying bonds that Greece will issue,” Wen said, speaking through an interpreter.

“China will undertake a great effort to support euro zone countries and Greece to overcome the crisis.”

Greece needs foreign investment to help it fulfill the terms of a 110 billion euro (US$150 billion) bailout. This rescued it from bankruptcy in May but also imposed strict austerity measures, deepening its recession.

Greece, which has been raising only short-term loans in the debt market, has said it wants to return to markets some time next year to sell longer-term debt, although the EU/IMF package llows it to wait until 2012.

“I am convinced that with my visit to Greece our bilateral relations and cooperation in all spheres will be further developed,” Wen told Greek Prime Minister George Papandreou earlier in the day.

Greece and China pledged to stimulate investment in a memorandum of understanding and private companies signed a dozen deals in areas like shipping, construction and tourism.

“Our two countries, both historical and modern, have to strengthen our relations in all sectors, to move on and overcome present difficulties,” said Wen, speaking through an interpreter in televised comments.

The investment memorandum does not target specific investment volumes, an official close to Investment Minister Harris Pamboukis said ahead of Wen’s visit.

“We want to build this strategic partnership with China,” the investment ministry official said. “The purpose is not a signature on something big.”

China has said it needs to diversify its foreign currency holdings and has bought Spanish government bonds. In January, Greece denied media reports it planned to sell up to 25 billion euros of bonds to China.

Wen will address the Greek parliament on Sunday and leave early on Monday for Brussels, where he will attend an EU-China summit before going on to Germany, Italy and Turkey.

Clinching business deals with countries such as China and Qatar would help boost confidence among Greek consumers and businesses, economic analysts said.

With the global economic crisis and competition with other Balkan countries increasing, foreign direct investment in Greece fell from 6.9 billion euros in 2006 to 4.5 billion in 2009, according to Investment Ministry figures.

Chinese investment represents a very small proportion of this, excluding a 35-year concession deal China’s Cosco signed in 2008 to turn the port of Piraeus into a regional hub for a guaranteed amount of 3.4 billion euros, according to port authority figures.

Wen is also likely to deal with international pressure on China over its currency exchange policies during his tour.

CNBC’s Kudlow Comments

He sort of gets some of it.

There are many debates among economists about how to resurrect the subpar, so-called recovery and generate some serious new job creation. But there is also widespread agreement that nations cannot tax their way into prosperity,

Right.

devalue their way into prosperity,

Depends on how you define prosperity. Japan sort of did it this way. Not ideal, due to suboptimal real terms of trade, etc., but that’s they way they set up their system. And as soon as they stop devaluing their currency (buying dollars) they have problems. Europe is in the same bind.

spend their way into prosperity,

This is wrong. The output must be sold, either to the public sector or the private sector. That’s a political choice- public goods or private goods.

or pursue trade-limiting protectionism as a path to prosperity.

This can also work, but as above, is suboptimal in general. And, it is vital when it comes to strategic materials and intellectual knowledge. For example, military needs are best sourced domestically to assure a supply in times of war, etc.

All of this is weakness.

I’d say in general yes, all of his argument displays a weakness of understanding.

:)

in case you thought Dallas Fed Pres Fisher understands monetary operations and banking

Fisher Speech

Summary from MNS:
FED: Dallas Fed Pres Fisher (votes on FOMC in ’11) is a hawk on QE2.
Says “it is not clear that the benefits of further quantitative
easing outweigh the costs,” especially if U.S. has “anemic recovery, but
not one that slips into reverse gear.” Barring further shock, he has
“concerns about the efficacy of further expanding the Fed’s balance
sheet until our political authorities better align fiscal and regulatory
initiatives with the needs of job creators. Otherwise, further
quantitative easing might be pushing on a string. In the worst case, it
could flood the engine of the economy with gas that might later ignite
inflation.”

U.S. Data/Dudley


Karim writes:

Data: General impression is manufacturing is slowing but ‘building blocks’ for consumer getting better (sorry for delay)

Consumer

  • Personal income up 0.5% in Aug and now running 3.3% y/y


This is a very significant positive. With personal income rising at this rate the chances of negative growth are slim and none.

  • Savings rate back up to 5.8% from 5.7%


Funded by the ongoing federal deficit.

  • Also of interest is core PCE at 0.1%, keeps Y/Y rate at 1.4% for the 3rd straight month-pretty far from deflation territory and close to the Fed’s desired 1.5-2.0% range

Coupled with the unemployment rate keeps the Fed on hold for now.

Also, watch car sales as today’s data looks pretty good. Cars and housing would be the signal that domestic credit expansion is beginning to kick in.

    ISM

  • “Business results (top and bottom line) continue to meet or exceed our operating plan and exceed prior year performance by double digits.” (Chemical Products)
  • “Business continues flat relative to prior month and is expected to remain flat. Commodities continue to be the main concern heading into 2011.” (Food, Beverage & Tobacco Products)
  • “Our business is softening due to seasonal considerations. Overall, our situation is much better than 2009.” (Machinery)
  • “Customers seem to be pulling back on orders. I suspect that they are trying to reduce their inventory for the approaching year-end.” (Transportation Equipment)
  • “Strategic customers reducing order quantities.” (Computer & Electronic Products)

Most ISM categories weaker, but still in expansion mode; New Orders vs Inventories Spread not looking great



ISM Sept Aug
Index 54.4 56.3
Prices paid 70.5 61.5
Production 56.5 59.9
New Orders 51.1 53.1
Inventories 55.6 51.4
Employment 56.5 60.4
Export Orders 54.5 55.5
Imports 56.5 56.5


Dudley

  • Key line in speech today: “further action is likely to be warranted unless the economic outlook evolves in away that makes me more confident that we will see better outcomes for both employment and inflation before too long.”
  • Doesn’t sound too patient!



And looks to me like better days are coming.

Ireland Banking System Recapitalization

On Fri, Oct 1, 2010 at 9:14 AM, wrote:
Note the Anglo (not Allied) Irish Bank has been split up into a bad bank, the Asset Recovery Bank, and a good bank, the Funding Bank. The Asset Recovery Bank requires 29 bb and the Funding Bank 250 mm Euro. Allied Irish Bank is also to be split eventually into a good bank/bad bank structure.


Where is the Irish government getting 29.3 bb of Euro to recapitalize Anglo Irish Bank?

It doesn’t ‘get’ the money, as you next state.

The government will issue promissory notes to recapitalize Anglo Irish Bank (this is unrelated to the NAMA program activity), which the bank can count towards their capital base.

Right, capital isn’t ‘spent’ until there are losses and depositors want out. It is just ‘counted’

The promissory notes will be amortized over a 10 yr period. Currently the government is estimating that a total of 29.3 bb in capital will need to be provided to Anglo Irish Bank. Of this 29.3 bb, 23 bb has already been given to the bank in the form of promissory notes. The Irish MOF has stated that no additional borrowing will be required this year due to the additional capital support needed.

Right, and going fwd the bank can buy irish debt that will ‘count’ as capital which is the same as the notes it now holds. So in that sense it’s ‘self funding’ and all nothing more than a guarantee of the govt. that we call deposit insurance. But as previously discussed it’s like having a US State provide the deposit insurance over here.

Given the bank related issuance plan, it is my understanding that Ireland’s debt to GDP program will show a significant jump at year end as the European Commission has required Ireland to include this issuance in their reported debt figure. This should not be new information but the headline debt/gdp number, which may break 100% when it is released, may get the markets attention.

Functionally ‘debt’ should include all the deposit guarantees, not just this one. But that’s another story

In addition, the government will fast-track the transfer of Anglo Irish Bank’s remaining bad loans to NAMA in order to be finished by early 2011. The haircut for the remaining 19 bb euro loans to be transferred will be 67% in the base case scenario well above the average of 56% for the first two tranches transferred totaling 16 bb euros. The total transfer of bad loans from Anglo Irish Bank is projected to total €35bn.

Actual losses on that portfolio will be actual losses to Ireland

Current Status of NAMA Program


Program is not completed yet.
81 bb euro face value of loans from 5 different banks, including Anglo Irish Bank, are expected to be transferred to the government (NAMA)
Two tranches of transfers have been completed for a total of 3,518 loans with a face value of 27.2 bb euro
The loans were given a haircut of 52.3% on average. NAMA bond issuance to the banks in exchange for these loans has totaled 13 bb euros
A third tranche is expected to be completed this month (Sept) involving 12 bb euro face value of loans (not including the haircut)


While the ECB does not disclose the collateral it receives in return for loans via its main refinancing operation (MRO) or its long term repo operation (LTRO) it is presumed that the NAMA issued bonds have been given to the ECB as collateral for funding at the policy rate.

Makes sense. Underneath it all the ECB is supporting the funding by buying irish bonds.

Miscellaneous


By December Allied Irish Bank (not to be confused with Anglo Irish Bank) is scheduled to raise 5.4 bb in capital. A rights issue for approximately 3 bb euro is expected to be fully underwritten by the National Pension Reserve Fund Committee (NPRFC) and offered to existing shareholders. The NPRFC currently holds 15 bb euros in liquid assets according to UBS which would be available for this transaction.


Based on the haircuts used for NAMA transfers, the central bank has requested an additional capital injection for the Irish National Building Society of 2.7 bb euro. The MoF plans to inject this extra capital via promissory notes as well.

Japan Recap- Prime Minister Says Huge Public Debt Unsustainable

More modest signs of improvement in Japan, with employment and spending improving.

Unfortunately, the Prime Minister seems be about to make the same mistake of past Prime Ministers and take action to reduce the govt’s deficit.

In contrast, China seems to have recognized govt spending spending (and lending by state owned banks that is in fact thinly disguised govt spending) is not operationally dependent on revenue, and that there is no solvency issue nor external constraints on local currency expenditure. China seems to understand the risks are inflation, making adjustments as they see that political threat arise.

See comments below.

Aug Job-To-Applicant Ratio: 0.54% vs 0.54% (expect) / 0.53% (last)

Aug Jobless Rate: 5.1% vs 5.1% (expect) / 5.2% (last)

Aug Household Spending (YoY): 1.7% vs 1.4% (expect) / 1.1% (last)

Sep Tokyo CPI (YoY): -0.6% vs -0.9% (expect) / -1.0% (last)

Sep Tokyo CPI Ex-Fresh Food (YoY): -1.0% vs -1.0% (expect) / -1.1% (last)

Sep Tokyo CPI Ex-Fresh Food & Energy (YoY): -1.3% vs -1.4% (expect) / -1.4% (last)

Aug National CPI (YoY): -0.9% vs -0.9% (expect) / -0.9% (last)

Aug National CPI Ex-Fresh Food (YoY): -1.0% vs -1.0% (expect) / -1.1% (last)

Aug National CPI Ex-Fresh Food & Energy (YoY): -1.5% vs -1.5% (expect) / -1.5% (last)

Japan Prime Minister Says Huge Public Debt Unsustainable

October (Reuters) — Japan’s prime minister warned on Friday that the country’s fiscal situation was unsustainable given its huge public debt, and called for multiparty tax reform talks as he struggles with a fragile economy and a divided parliament.

With perhaps the world’s largest public debt, severe prior downgrades by the ratings agencies, perhaps the strongest currency in the world, mild deflation, and yet ten year JGB’s hovering around 1%, you’d think the historical evidence alone would convince them there is no solvency or funding or ‘sustainability’ issue. But clearly it doesn’t. And while those in monetary operations at the BOJ understand there is no sustainability issue, it is not their place to mention it (much like the US).

Naoto Kan also repeated his resolve to curb a rise in the yen that threatens to derail Japan’s export-led economic recovery, urged the central bank to do more to fight deflation, and expressed hope that opposition parties would join in talks on a extra budget he wants to enact soon.

This seems to indicate he’s pushing for a higher deficit? Or will there be a new tax to ‘pay for it?’ And the only way to weaken the yen vs the dollar is to buy dollars, which is what I call off balance sheet deficit spending. It ‘works’ and there are no operational limits to the amount of fx a CB can buy. But it’s a poor second choice to a domestic tax cut or spending increase.

Japan’s core consumer prices marked their 18th straight month of annual declines in August, as deflation grips an economy struggling with a rising yen, slowing exports and a surprise decline in output. But the jobless rate fell and the availability of jobs improved slightly, data showed on Friday.

Yes, the deficit did go up in the financial crisis slowdown and got large enough to support growth. The question is whether they allow that to continue.

Kan, who took office in June as Japan’s fifth leader in three years, faces a tough time wooing the opposition support that is vital to enact laws since his Democratic Party of Japan (DPJ) and a tiny partner lack a majority in parliament’s upper house.

The government faces the delicate task of reining in debt while keeping the economy going. Japan has built up a huge public debt burden, now nearly twice the size of its $5 trillion economy, during two decades of economic stagnation.

It might help if the media stopped calling it a burden, as it’s clearly not a burden in any sense. particularly with a 0 rate policy (not that it matters for solvency).

“If the current fiscal situation is left alone, it will be unsustainable at some point,” Kan said in a speech at the start of an extra session of parliament.

I doubt he could define ‘unsustainable’ but no one asks as the errant sustainability assumption is pervasive.

He also vowed to achieve Tokyo’s goal of bringing the primary budget balance, which excludes revenue from bond sales and debt-servicing costs, into the black within a decade.

Extra Budget

Kan, whose past calls for debating a hike in the 5 percent sales tax had contributed to a July upper house election defeat, said Japan needs a social welfare system that citizens could trust even if that meants added financial burden on the public.

Multiparty debate on tax reform including the sales tax is thus indispensable, Kan said, reiterating that he would seek a mandate from voters before deciding on the sale tax rise.

The government is crafting an extra budget for the fiscal year to March 31 to stimulate the economy by supporting job seekers and families with children, but has sent mixed signals about the size of the package and how it will fund it.

It does look like they plan on ‘funding it’

Some in the cabinet, such as the economics minister, have said new debt issuance should not be ruled out, but the finance minister is firmly against the idea.

National Strategy Minister Koichiro Gemba has said Japan could fund measures worth around 4.6 trillion yen ($55 billion) by tapping reserves, thereby avoiding new bond issuance.

Functionally this would be the same as deficit spending.

“The biggest task for this parliamentary session is enacting a supplementary budget to finance economic steps. I sincerely hope for constructive debate among ruling and opposition parties,” Kan said in the speech.

Efforts to gain such opposition support will be complicated by a bitter feud with China.

Kan is under fire for appearing to cave in to Beijing’s demands to free a Chinese fishing boat captain detained last month after his trawler collided with Japanese patrol boats near disputed islands in the East China Sea.

The prime minister on Friday reiterated that good ties with China, in the process of replacing Japan as the world’s second-biggest economy, were vital but also expressed concern about Beijing’s military buildup and aggressive maritime activities.

China still has bitter memories of the last war with Japan.