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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 | Link to Comment 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 | Link to Comment Anonymous
Tue, 10/06/2009 - 14:28 | Link to Comment chumbawamba
chumbawamba's picture

Examples?

I am Chumbawamba.

Tue, 10/06/2009 - 15:15 | Link to Comment Miles Kendig
Miles Kendig's picture

Catch my classical reference last night?

I am J.A.F.O.

Tue, 10/06/2009 - 15:32 | Link to Comment chumbawamba
chumbawamba's picture

I think so.  What thread?

I am Chumbawamba.

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

 

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

Tue, 10/06/2009 - 14:14 | Link to Comment 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 | Link to Comment Anonymous
Tue, 10/06/2009 - 14:00 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment buzzsaw99
buzzsaw99's picture

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

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

Thank you!  Much appreciated.

Tue, 10/06/2009 - 14:16 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment Anonymous
Tue, 10/06/2009 - 14:18 | Link to Comment 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 | Link to Comment chumbawamba
chumbawamba's picture

Yep, like with your credit cards.

DEBTOR'S REVOLT!

I am Chumbawamba.

Tue, 10/06/2009 - 15:50 | Link to Comment Anonymous
Tue, 10/06/2009 - 18:50 | Link to Comment Anonymous
Wed, 10/07/2009 - 02:09 | Link to Comment 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 | Link to Comment 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 | Link to Comment Anonymous
Tue, 10/06/2009 - 14:23 | Link to Comment 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 | Link to Comment Anonymous
Tue, 10/06/2009 - 19:40 | Link to Comment Anonymous
Wed, 10/07/2009 - 02:11 | Link to Comment 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 | Link to Comment Anonymous
Tue, 10/06/2009 - 14:29 | Link to Comment Anonymous
Tue, 10/06/2009 - 18:43 | Link to Comment Anonymous
Tue, 10/06/2009 - 19:24 | Link to Comment Anonymous
Tue, 10/06/2009 - 20:16 | Link to Comment Anonymous
Tue, 10/06/2009 - 20:32 | Link to Comment Anonymous
Tue, 10/06/2009 - 22:19 | Link to Comment Anonymous
Tue, 10/06/2009 - 20:33 | Link to Comment Anonymous
Tue, 10/06/2009 - 14:40 | Link to Comment Anonymous
Tue, 10/06/2009 - 14:50 | Link to Comment svendthrift
svendthrift's picture

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

 

 

Tue, 10/06/2009 - 15:08 | Link to Comment 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 | Link to Comment DBLTapViper
DBLTapViper's picture

Hey Tyler,  more Janet! 

Tue, 10/06/2009 - 15:18 | Link to Comment svendthrift
svendthrift's picture

Jes. Agree. More Janet.

Tue, 10/06/2009 - 15:13 | Link to Comment Anonymous
Tue, 10/06/2009 - 15:19 | Link to Comment Careless Whisper
Careless Whisper's picture

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

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

Maybe a Tony Danza, but not a dirty Sanchez.

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

Ms. Tavakoli rocks.

 

Tue, 10/06/2009 - 15:33 | Link to Comment Anonymous
Tue, 10/06/2009 - 17:10 | Link to Comment Anonymous
Tue, 10/06/2009 - 19:09 | Link to Comment Miles Kendig
Miles Kendig's picture

+!

Tue, 10/06/2009 - 15:34 | Link to Comment Anonymous
Tue, 10/06/2009 - 15:35 | Link to Comment Anonymous
Tue, 10/06/2009 - 16:04 | Link to Comment 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 | Link to Comment 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 | Link to Comment 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 | Link to Comment Anonymous
Wed, 10/07/2009 - 03:07 | Link to Comment 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 | Link to Comment 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 | Link to Comment Anonymous
Wed, 10/07/2009 - 09:27 | Link to Comment 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 | Link to Comment Anonymous
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