Euro Head Says China Currency Bonds Possible; Crisis Not Over

|
Posted: Oct 31, 2011 12:12 AM

Klaus Regling, head of the European Financial Stability Facility has proposed European Bailout Fund Could ‘One Day’ Issue Bonds in Yuan

The euro area’s bailout fund could at some point issue bonds denominated in the Chinese currency, Chief Executive Officer Klaus Regling said in Beijing today.

“We are authorized to use any currency we want if it seems efficient so we may one day issue in U.S. dollars or renminbi,” said Regling, head of the European Financial Stability Facility, using another name for the yuan. “It depends whether the Chinese authorities would approve of that. I could imagine that over the years that might happen, maybe not immediately but maybe one day,” he said.

European leaders are seeking financial support from China, holder of the world’s largest foreign-exchange reserves, for an enlarged rescue fund aimed at containing the region’s sovereign- debt crisis. Vice Finance Minister Zhu Guangyao said yesterday his government wants more details about the “technicalities” before making any decision on investment.

Regling said yesterday that China, which has been a “good” and “loyal” purchaser of EFSF bonds so far, hasn’t set any conditions for buying more of the securities.

Financial Suicide

Issuing bonds in another currency risks financial suicide. Currency movements add to the already massive potential risk of huge fluctuations because of leverage.

Argentina blew up when it could no longer hold a peg in US dollars. While not a peg, imagine the losses on long-term bonds on a leveraged fund were the Yuan to rise by 33% vs. the Euro.

Many homeowners in Eastern European countries have housing loans in Euros or Swiss Francs and have paid a severe price as the value of their currency has dropped vs the Euro and even more so vs the Swiss Franc.

Perhaps the yuan would sink vs. the Euro, but anyone entertaining the risk is severely lacking in financial competence.

Moreover, that Regling would even suggest such a foolish thing says the EU not only expects this crisis will linger for a long time, and it does not believe it has buyers for the debt it issues.

Yen Debase:

The headlines on the Yen tonight are rather amusing.

Two hours ago Bloomberg reported Yen Climbs to Postwar Record Versus Dollar as Traders See No Intervention

First Bloomberg reported Yen Drops on Intervention; Aussie Weakens

Then 30 minutes later Bloomberg reported Yen Tumbles as Japan Sells Currency Third Time in 2011

The yen dropped as Japan stepped into foreign-exchange markets to weaken the currency for the third time this year after its gains to a postwar record threatened an export-led economic recovery.

“I’ve repeatedly said that we’ll take bold action against speculative moves in the market,” Japanese Finance Minister Jun Azumi said to reporters today in Tokyo after the government intervened unilaterally. “I’ll continue to intervene until I am satisfied.”

The yen sank as much as 4 percent to 78.98 per dollar and traded at 78.19 as of 11:10 a.m. in Tokyo from 75.82 in New York Oct. 28.

I like to watch these headlines for a bit to see where they are going. Here is a chart of the action.

Yen 15 Minute Chart



Intervention Never Works

Japan has stuck out twice this year on intervention efforts and numerous times before. Why should this time be any different?

Currency intervention never works. However, it may appear to work if by some lucky chance intervention came at the time the Yen was ready to reverse on its own accord.

The race to debase is back on.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com