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Guest Post: China Defaults, Currency Basket Threatens Dollar

Tyler Durden's picture




 

Submitted by Janet Tavakoli of Tavakoli Structured Finance

Robert Fisk exposed revived discussions by the Gulf States, China, France, Japan, Brazil, and Russia to replace the dollar as the benchmark oil trading currency with a basket of currencies including gold within 10 years.  This proposal is not new and discussions have been ongoing for decades.  But other extraordinary moves in the capital markets suggest we should take this threat to the dollar’s position very seriously.  For example, China has $2.3 trillion in currency reserves (about 70% in dollars), and China knows how to get its way.

In November 2008, Chinese banks said they would no longer play by our rules.  Top tier banks (Bank of China and Industrial and Commercial Bank of China) reneged on derivatives contracts.  They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation.  This should have been headline news in every financial newspaper, but it wasn’t.

Chinese banks defaulted.  They may have been partially motivated by U.S. malfeasance in the capital markets that caused losses in Asia.  The U.S. squandered its credibility and our cover-ups have done nothing to restore it.

Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties.  Everyone was forced to renegotiate contracts with the Chinese banks.
From the perspective of the derivatives markets, this is earth shattering.  What would have happened if AIG had done the same thing?  (Hey, Goldman, UBS, and others…you want your collateral?  Well…Stuff It!)

At the end of August 2009, China signaled that state owned oil consumers: Air China, COSCO, and China Eastern could default on money-losing commodities derivatives contracts.

If we had been paying attention, the U.S. should have done everything in its power to correct our mistakes, clean up the mess in our financial system—instead of sweeping it under the carpet—and turned our efforts to maintaining the credibility of the capital markets and the credibility of the dollar.

 

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Tue, 10/06/2009 - 13:57 | 90297 bruce wayne
bruce wayne's picture

"Speak softly and carry a big stick."

I wonder if China's rather noisy power proclamations are not meant to hide true weakness.

Tue, 10/06/2009 - 14:20 | 90360 Anonymous
Anonymous's picture

without a doubt

Tue, 10/06/2009 - 14:28 | 90376 chumbawamba
chumbawamba's picture

Examples?

I am Chumbawamba.

Tue, 10/06/2009 - 15:15 | 90465 Miles Kendig
Miles Kendig's picture

Catch my classical reference last night?

I am J.A.F.O.

Tue, 10/06/2009 - 15:32 | 90504 chumbawamba
chumbawamba's picture

I think so.  What thread?

I am Chumbawamba.

Tue, 10/06/2009 - 15:38 | 90520 Miles Kendig
Miles Kendig's picture

 

The Twiztid ref...  I'll look if ya need it.

Tue, 10/06/2009 - 14:14 | 90341 Gilgamesh
Gilgamesh's picture

Everyone out of the (dark) pool!  <Insert pic of Snickers Bar> 

 

I think some big name was out talking that a second round of bank deteriorations could be upcoming. 

Tue, 10/06/2009 - 15:34 | 90510 Anonymous
Anonymous's picture

don't you mean Baby Ruth?

Tue, 10/06/2009 - 14:00 | 90304 ghostfaceinvestah
ghostfaceinvestah's picture

More financial wars, they will be opening up on many fronts.  There is not enough wealth to go around.

Tue, 10/06/2009 - 14:02 | 90310 Pilatus
Pilatus's picture

No surprise there, in the early 90's, a suger broker I was doing business with went belly up because China reneged on derivatives contracts

Wed, 10/07/2009 - 08:37 | 91205 blindfaith
blindfaith's picture

Folks don't get that you play by Chinese rules or you don't play.  They regneg on you that is OK, you regen on them and you never do business in China again.

Lets buy more stock in "American" companies located in Chinaso they can continue to build up China at the cost of a few American jobs...I mean that is just as American as it is Chinese these days.  One day the Chinese will take over everyone of them and dare you investors to try and collect.

Tue, 10/06/2009 - 14:03 | 90316 buzzsaw99
buzzsaw99's picture

Yeah, but old Bennie made good on those agency bonds. Genius stuff!

Tue, 10/06/2009 - 14:06 | 90323 You Cant Handle...
You Cant Handle the Truth's picture

I'd love to see a chart of the DOW or the SP500 in Euros from about 1999-present.

I'll have to see what I can do if I can't find it online.

Tue, 10/06/2009 - 14:46 | 90414 omi
omi's picture

stockcharts  $SPX:$XEU

 

http://stockcharts.com/c-sc/sc?s=$SPX:$XEU&p=D&b=5&g=0&i=t28088541571&r=6043

Tue, 10/06/2009 - 15:24 | 90485 You Cant Handle...
You Cant Handle the Truth's picture

Thank you!  Much appreciated.

Tue, 10/06/2009 - 14:16 | 90346 exportbank
exportbank's picture

There was a time when the USD was backed by the full faith and credit of the American thinker, inventor and good old hard worker. You could "bank" on that.

Now it's backed by a printing press and a bunch of Wall Street gamblers.

Sounds like a win-win formula for the future. I'm not saying there aren't a slew of countries in the same boat - but I grew up with the US as the invincible King of everything.

Tue, 10/06/2009 - 15:56 | 90554 SWRichmond
SWRichmond's picture

There was a time when the USD was backed by the full faith and credit of the American thinker, inventor and good old hard worker. You could "bank" on that.

Yes, and this is the saddest thing of all, and it is what I want to restore.  America shone in large part because it let the genie of human ingenuity out of the bottle.  The damned control freak statists have been working ever since to put it back in.  We are more than we have become.

Tue, 10/06/2009 - 20:03 | 90903 mkkby
mkkby's picture

Ah, for the good old days. NOT! It was just as corrupt then as it is now. Human behavior is the only constant.

Tue, 10/06/2009 - 20:19 | 90917 SWRichmond
SWRichmond's picture

But the opportunity to succeed unencumbered still existed; the size and influence of government has continued to grow over the years, and now everything that anyone wants to do is either illegal or is regulated.  Human behaviour IS constant, and with larger government we get larger influence due to government corruption backed by the force of law.

Tue, 10/06/2009 - 22:02 | 91003 Anonymous
Anonymous's picture

Yeah, the opportunity to succeed unencumbered by masked mobs dragging the maleficent bankers out into the street and hanging them outright has been negated by government regulation, lying, respect for the force of law, and the willing embrace of ignorance and helplessness of the population at large.

If Obama actually declared a bank lynching holiday, how many citizens would actually be out there putting a gut wrenching fear in the guilty who strut about confident in their belief of a perfect protection bought and sealed? Well, not enough, because the citizenry appear willfully ignorant gutless and unmotivated as the elected.

Tue, 10/06/2009 - 14:18 | 90349 bugs_
bugs_'s picture

What a shock.  If it is OK to default in a workers'

paradise it should be OK to default anywhere.

Tue, 10/06/2009 - 14:29 | 90382 chumbawamba
chumbawamba's picture

Yep, like with your credit cards.

DEBTOR'S REVOLT!

I am Chumbawamba.

Tue, 10/06/2009 - 15:50 | 90543 Anonymous
Anonymous's picture

+100

Tue, 10/06/2009 - 18:50 | 90835 Anonymous
Anonymous's picture

I have a medium-term strategy. I currently never carry a credit card balance, I pay my bills from a debit account. Since I will be able to cover my monthly bills I am considering paying all my bills with credit cards. My thought is that I can rack up ~$1,000/ month (mortgage not included) in credit card bills which must be backed $1 for $1 by the credit card company since my card is unsecured credit. One little person can freeze $1,000 of TBTF Bank capital at no cost to his/her self as long as the balance is paid!

Wed, 10/07/2009 - 02:09 | 91135 chumbawamba
chumbawamba's picture

Better yet, buy gold and silver with your credit cards.  Then wait until the system defaults.

I am Chumbawamba.

Tue, 10/06/2009 - 14:19 | 90356 waterdog
waterdog's picture

There is a reason it is called a basket of currencies. It is actually a hand basket of currencies. The fastest way to hell is in a hand basket.

Creating a currency mix to be used to purchase oil, proves that very few countries understand the problems for oil beginning in late 2011.

Some of the countries in this proposed basket will become victims of oil by 2016.

Tue, 10/06/2009 - 14:22 | 90366 Anonymous
Anonymous's picture

so true....

Tue, 10/06/2009 - 14:23 | 90367 chumbawamba
chumbawamba's picture

Janet's great but she apparently hasn't been paying attention. China had 2.3T in US dollar reserves but they've been spending them like Paris Hilton on a weekday over the past year.  Just the other day they announced close to $10B in energy and resource deals in different parts of the world (S.A., Africa).

I will not be surprised if at the end of the year China announces it holds less than $100B in US debt.  That's when TSHTF.

I am Chumbawamba.

Tue, 10/06/2009 - 14:27 | 90375 Anonymous
Anonymous's picture

china has been converting its moldy cheese into
souffle....it can't get rid of dollars fast enough...

the creditor makes the rules...something the
tick turds in washington and in flyover country
never understood....it takes a village to be an
idiot....

Tue, 10/06/2009 - 19:40 | 90881 Anonymous
Anonymous's picture

True, but consider in proportion what $10 billion means when you have to spend $2.3 trillion before it goes bad. It's like I have $10 to spend. I find something I like, then all the locals give me a complete raft of shit because I'm spending $10 that the locals don't have. Not like they don't like money, but they really don't want to surrender their stuff to "ferners". Mind you, I have relatively $2300 in total to spend. Can you appreciate what a pain in the ass it will be to spend that kind of money when every $10 is a pain in the ass inquisition from the riled up locals?

If the Chinese want open arms deals, please have them come to Calif and mop up all this excess real estate.

Wed, 10/07/2009 - 02:11 | 91136 chumbawamba
chumbawamba's picture

WTF?  What are you talking about?  The Chinese have been buying up shit all over the globe for the past year plus.  It gets reported all the time in the financial press.  Chances are good you'll read about another such acquistion in tomorrow's news.

I am Chumbawamba.

Tue, 10/06/2009 - 14:25 | 90372 Anonymous
Anonymous's picture

it was wonderful having words by royalty...janet is on my short short lists of must reads....

i agree with the assessment that china is no angel and we should stop denigrating ourselves on the notion that it is virtuous and we are not....

however, the usa, if it is indeed a leader and not a geopunk, must acknowledge its own sins and sin no more....

unfortunately the fire economy owns policy and is not inclined to rehab - the self righteous don't need rehab...and crooks don't have time for it....

Tue, 10/06/2009 - 14:29 | 90384 Anonymous
Anonymous's picture

Well, if many within the business and political cadre conclude that expanding commercial integration with a totalitarian state is a swell idea (largely because labor costs are low and nicely controlled), I don't have much sympathy to offer when the fecal matter hits the fan blades.

Leadership. Morals. Mandarins are laughing.

Tue, 10/06/2009 - 18:43 | 90826 Anonymous
Anonymous's picture

FYI: China is not a "totalitarian" state. It is a one-party dictatorship politically which is partially centrally-planned economically. "Totalitarian" (e.g., Hitlerian Germany, Stalinist Russia and Maoist China) refers to a socio-political system in which virtually all (hence "total...") aspects of public and private life are programmed, monitored, and controlled, with secret police widely distributed to remove and severely punish all nonconformists and individualists. In a "we are the good guys and they are the bad guys" state of mind one can get confused about the differences between socialism and communism, capitalism and fascism, dictatorship and totalitarianism, but it would be helpful to study these differences before using such terms.

Tue, 10/06/2009 - 19:24 | 90867 Anonymous
Anonymous's picture

"A one-party dictatorship politically which is partially centrally-planned economically."

So, pretty much like America.

Tue, 10/06/2009 - 20:16 | 90915 Anonymous
Anonymous's picture

Yeah . . . so based upon your description, China is a totalitarian state. Thanks for the collegiate-level perspective you've brought to the table, though.

Tue, 10/06/2009 - 20:32 | 90929 Anonymous
Anonymous's picture

China is just a weird sort of Neo-Fascist state, the kind of state the Federal government wants impose here.

Tue, 10/06/2009 - 22:19 | 91021 Anonymous
Anonymous's picture

"America is not fascist nor totalitarian, its a democracy, or so most americans think (at least those who still have a brain). But what good is a democracy in name when it is ruled by small group of bankersholding a puppet string leashed to almost all of its politicians, intellectuals and policy makers? And when the typical american journalist doesn't understand or is too lazy to understand sixth grade math to know they are being lied to by the government? And less than 50% of them turn out to vote every 4 years? And many still thinks their President is an Arab?

The American people is being walked day by day closer into an abyss, the abyss of hyperinflation, of wars started and to be started to bring at the good ol american patriotism to the forefrnt to forget the mountains of debt their children would have to repay somehow. The end is near, I can read and see it in the comments of many of you still in denial.

Tue, 10/06/2009 - 20:33 | 90931 Anonymous
Anonymous's picture

china is a totalitarian state and meets the
definition you provided....you try acting outside
of prescribed norms and see how fast you find a
secret police agent with a rifle up your butt....

and the usa and china are converging so quickly that
the spread between one form of totalitarianism
and the other differs only of degree rather than
of kind...don't want to take a vaccination in the
usa? you will find yourself in a concentration camp faster
than you can saying burning jew....

the state lock on religion, massacres in public,
and other barbaric behavior is abhorent and the
act of a brutal regime which will do anything to
maintain the position of the one party....

Tue, 10/06/2009 - 14:40 | 90403 Anonymous
Anonymous's picture

The Chinese are Alpha males and us Americans unreliable Beta's. We're too scared to take on the TBTF banks. The Chinese aren't scared of shit.

Go China!

Tue, 10/06/2009 - 14:50 | 90407 svendthrift
svendthrift's picture

edit: #90403 Was me.. Forgot to sign in.

 

 

Tue, 10/06/2009 - 15:08 | 90450 Miles Kendig
Miles Kendig's picture

Good questions to which inquiring minds would like to know some believable answers.

BTW, anyone here know if Janet likes Mozart?

Tue, 10/06/2009 - 15:12 | 90459 DBLTapViper
DBLTapViper's picture

Hey Tyler,  more Janet! 

Tue, 10/06/2009 - 15:18 | 90474 svendthrift
svendthrift's picture

Jes. Agree. More Janet.

Tue, 10/06/2009 - 15:13 | 90461 Anonymous
Anonymous's picture

The US has a "strong dollar policy", well it has had an amazing effect on the Nikkei... fallen 1000 points thanks to the strong yen, meanwhile in the land of bits and bytes all goes along at the speed of light gunning more poor shorts who ventured in for a split second and got their heads blown off

Tue, 10/06/2009 - 15:19 | 90476 Careless Whisper
Careless Whisper's picture

China is not going to take a dirty sanchez from Wall Street.

Tue, 10/06/2009 - 17:18 | 90720 Marge N Call
Marge N Call's picture

Maybe a Tony Danza, but not a dirty Sanchez.

Tue, 10/06/2009 - 15:21 | 90478 George Washington
George Washington's picture

Ms. Tavakoli rocks.

 

Tue, 10/06/2009 - 15:33 | 90509 Anonymous
Anonymous's picture

What does this mean? Is there a layperson's version of this?

Anyone have any suggestions on what I have to read/study to understand half the things said/written on the site? It's pretty interesting stuff, but completely (for now) going over my head.

Tue, 10/06/2009 - 17:10 | 90717 Anonymous
Anonymous's picture

Newbies to ZH don't get their questions answered by posting in the comments section. Using google/wikipedia works to define some terms. Also the Financial Times site has a lexicon that'll define some of the terms. Most importantly, *keep reading*--it will start to make sense from the context of various posts and comments, trust me. Don't get discouraged! Took me about a three weeks until I started to make sense of what I was reading here.

Well worth the time and effort.

Rula (not logged in; @work)

Tue, 10/06/2009 - 19:09 | 90861 Miles Kendig
Miles Kendig's picture

+!

Tue, 10/06/2009 - 15:34 | 90511 Anonymous
Anonymous's picture

Well,they stated publicly long time ago that they will use swap to exchange their tbs,and they have been busy buying commodities all over the map. So I don't know what Zimbabwee have in commodities,but for the currencies experts,please advise as to to what is the zimbawian currency worth now,and if it is up,then that could be a sign that Mogabee is heading in the right(or may be wrong in a couple of years)direction....

Tue, 10/06/2009 - 15:35 | 90514 Anonymous
Anonymous's picture

THis is all a story about confidence or a lacl of confidence. Gold and commodities are bid not on an inflation fear (the fact is we are in a frightening deflationary environment) but a strong currency trade. Gold and commodities are being viewed as "real" money and the dollar along with other paper as depreciating, risky stores of wealth.

Tue, 10/06/2009 - 16:04 | 90577 SWRichmond
SWRichmond's picture

At the end of August 2009, China signaled that state owned oil consumers: Air China, COSCO, and China Eastern could default on money-losing commodities derivatives contracts.

Wouldn't you just love to know who had the other side?

Tue, 10/06/2009 - 16:10 | 90594 Miles Kendig
Miles Kendig's picture

I am certain that the AIG 100%ers would just about cover it.

Tue, 10/06/2009 - 17:18 | 90719 Marge N Call
Marge N Call's picture

Good stuff. Thanks to Janet. I'd like to see more of her on ZH.

Wed, 10/07/2009 - 02:14 | 91138 Anonymous
Anonymous's picture

Speculators..-moving to real money, ha ha, I like that. Wood, forest, trees. Issuing SDR Bonds, I would guess, can only increase money supply further whilst without the interest rate paradox. The Bankers have found themselves in a war and choose to win by creating more land. They should examine why, despite overwhelming resources, they are letting the fundamentals get away from them. No, but.. a change in any new industrial production paradigm could be capacity tested from the outset -by being at war. Certainly, the legal framework exists for nations to run domestic affairs while at war. Actually, gosh.. the US and GB are at war!
Gold price surge..easy money outside the industrial sector.

Wed, 10/07/2009 - 03:07 | 91142 chindit13
chindit13's picture

This is yet another example of American Cultural Imperialism. First it was jeans and McDonald's, then gangsta rap and baseball hats askew, and now we've exported moral hazard.

The Chinese SOE's have learned that contracts to the good are valid, and contracts to the bad are for settlement on the American taxpayer's account.  If another US bank or IB writes even one more derivative contract with any firm in China, that will be a de facto admission that they expect the taxpayer to make good if the Chinese default.

Wed, 10/07/2009 - 05:06 | 91153 aus_punter
aus_punter's picture

i learnt the hard way....the Chinese SOE's do not give a fuck about contract, creditors rights or heirarchy of claims. 

 

Its like playing soccer against people who think it's fine to use their hands

Wed, 10/07/2009 - 08:22 | 91195 Anonymous
Anonymous's picture

Okay....if China stiffed our banksters on billions in
forex trades and WE picked up the tab for this as part
of the bailouts of the "too big too fails", where is
the goddamn public disclosure from Treasury or the Fed?
Anyone?

Wed, 10/07/2009 - 09:27 | 91241 Chumly
Chumly's picture

That's the trillion dollar question, the 50,000 lb. elephant in the room.  Who got stiffed and who really footed the bill?????

Thu, 10/08/2009 - 12:40 | 92957 Anonymous
Anonymous's picture

No worries....

The US needs China to keep on buying Treasuries....

Then the US can default....

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