Archive - Jun 17, 2011

Previously we disclosed that FRA-OIS spreads in both the US and Europe have been on a tear as a result of ongoing concerns that European liquidity may be frozen. Then following the previous post we decided to check in on Chinese liquidity. To our lack of surprise we find Chinese availability of unsecured interbank lending has quietly dropped to the second worst of 2011, now that the rate on 7 Day SHIBOR has hit 7.4%, the highest since the spike in early January, and a range that goes back all the way to the August 2007 quant market crash. Keep a close eye on this should Chinese vital interests become impaired and China is forced to dump trillions of money formerly reserved for US Treasurys (and currently held in US-denominated reserves, thus forcing a selling of USD and buying of EUR), to buy European debt, once the next two dominoes, Italy and Spain, fall.

The country which has so far been doubling down on its losses in European bond exposure, much to the amusement of cynical onlookers, has finally disclosed that Europe is the locus of Chinese vital self interests, and that should Europe go down, one very major domino would be the implosion of China itself. Per Reuters: "China's "vital" interests are at stake if Europe cannot resolve its debt crisis, the Chinese Foreign Ministry said on Friday as it voiced concern about the economic problems of its biggest trading partner. At a media briefing ahead of Chinese Premier Wen Jiabao's visit to Europe next week, Vice Foreign Minister Fu Ying made plain that China had tried to help Europe overcome its troubles by buying more European debt and encouraging bilateral trade..."Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us," Fu said. "China has consistently been quite concerned with the state of the European economy," she said." And just like every time before when China has tripled and quadrupled, and now quintupled, on Greek, Portuguese and other debt, so this time will be no different as merely loading up an insolvent entity with even more leverage does nothing but shorten the half life of each additional "bailout." When Greece blows up, forget the other European countries: keep a close eye on China.

In a completely irrelevant move, which will do nothing to help the government pass the much hated mid-term fiscal plan, or diffuse the social anger, this morning as expected George Papandreou picked outgoing Defence Minister Evangelos Venizelos as new finance minister, jettisoning George Papaconstantinou, architect of a belt-tightening programme that has stoked violent unrest and a revolt in his Socialist Party. Reuters correctly observes that the move seemed likely to buy time for the embattled prime minister but did little to dilute scepticism that Greece would be able to implement a new round of deeply painful reforms... Papaconstantinou becomes environment minister in
the reshuffle.The new cabinet is expected to be sworn in later on Friday
and a confidence vote is due by Tuesday night. Rather than giving new
impetus to the reforms, analysts said, the reshuffle was aimed primarily
at quelling dissent in the Socialist Party by moving the unpopular
Papaconstantinou and appointing the prime minister's main party rival
Venizelos." All this means is that instead of Sunday being the critical decision day when the vote of no confidence will be held, it will now be Tuesday, as Europe is now struggling to exist day to day, and push back the inevitable by 24 hours one day at a time. "The move failed to impress markets and the cost of
insuring Greek debt against default hit a fresh record above 2,000
basis points on Friday."

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