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Excudos, Excudos
Jan. 11th, 2011 11:38 amYields on Portuguese bonds actually fell this morning, leading some analysts to think that the current storm might be over. I fear that their optimism is misplaced. The reasons for the recovery in Portuguese bonds can be traced to two short-term factors, neither of which addresses the fundamental problems at the heart of the Portuguese economy.
The first was that Japan followed China in stating that it would buy bonds linked to a bailout fund. China (Portugal's 'new best friend') said the same a few days ago.
The second was that the ECB was said to be a buyer.
There's a marginal third factor, that being that Portugal's planned €1.25bn issue tomorrow is relatively small in scale. If you have a small-size issue, the power of the regulators is higher relative to the power of the market. It's easier to catch a falling brick than it is to catch a collapsing house.
And there's a technical fourth factor – the 20 basis point pull back represents a third of the 60 point rise in the previous few days. Pullbacks of about a third are standard in the world of profit-taking.
Although it's a psychological number, Portugal will be trying to keep below the 7% yield number with tomorrow's sale. Greece had to seek a bailout just over a week after its bond issues went through that number. Ireland lasted less than a month. Although all countries are different (to be frank, unless Portugal gets its act together and its books in balance, it could be borrowing at 6% and still be in deep fundamental trouble – the point is, at 6%, there's still belief in the 'bigger fool' theory, while at 7%+ that belief begins to evaporate).
The statement by Japan that it would buy bonds in a central bailout fund is the most interesting (as are most things that involve the far east economies). Where, one might ask, are Japan and China coming from here? What's their agenda?
Well, one thing we can rule out is that the decision is based purely on the profit motive. There are deeper forces at play.
The most obvious reason would be that any bailout-fund backing would be anti-dollar rather than pro-euro. It might seem odd for China, a huge holder of US dollars, to make an "anti-dollar" move, but the fact remains that it does not want the dollar to be the only game in town when it comes to reserve currencies. Therefore it wants the euro to survive and, if possible prosper. The paradox here is that we have one obvious replacement alternative reserve currency in the Yuan, but China will not allow that to happen?
For why? Because the period when a country moves from being the producer of a non-reserve currency to one of being the producer of a reserve currency is one of milk and honey for the general population. You just print money and other countries pay you real things so that they can store that money in their vaults. This is most definitely not what China wants. A rapidly rising standard of living would cause political instability that is anathema to the Chinese leadership. Therefore the Yuan must not be allowed to become a reserve currency.
That kind of causes unknown problems for the global economy, because there have only been two fiat currencies that have taken on this role in the past three hundred years – the pound sterling and the US dollar. And in both those cases it was a case of the laissez-faire markets being allowed to do their work. What will happen when the producing country says "no go"?
But that's by the by. The fact is, China and Japan have suddenly become euro-fans because they want an alternative super-currency. But they wouldn't do this if they thought that the euro was going to go tits up anyway.
So there's a mixture of motives at play here. China wants influence in the peripheral euro countries – what better way to do that than to invest there? This is already happening in Spain to an incredible degree. China and Japan also want the euro to survive, and the willingness of Japan to back a bailout fund indicates to me that this is the old Axis at work – Japan and Germany working together, with Japan believing that, in the last resort, Germany will step up to the plate.
Will that work? Possibly not. Japan's analysis falls down in that it might be assuming that what the leadership in Germany wants, the leadership in Germany gets. And this is a long way from certain. However, it's certainly true that having China and Japan "on-side" in the "the euro must survive" campaign counts for a lot.
Portugal will still need a bail-out. Spain will still need a bail-out. But while there was no way that Germany could save the euro in its current form if it was acting alone within Europe (even if the leadership wanted to), if it had Chinese firepower backing it up, it quite possibly could.
But all of this comes at a cost. The Chinese are not philanthropists. What would be the quid pro quo? Or, as one wit observed recently – the way the current global imbalances are going, within 30 years China will be producing everything and everyone else will borrow money from China to buy it.
The first was that Japan followed China in stating that it would buy bonds linked to a bailout fund. China (Portugal's 'new best friend') said the same a few days ago.
The second was that the ECB was said to be a buyer.
There's a marginal third factor, that being that Portugal's planned €1.25bn issue tomorrow is relatively small in scale. If you have a small-size issue, the power of the regulators is higher relative to the power of the market. It's easier to catch a falling brick than it is to catch a collapsing house.
And there's a technical fourth factor – the 20 basis point pull back represents a third of the 60 point rise in the previous few days. Pullbacks of about a third are standard in the world of profit-taking.
Although it's a psychological number, Portugal will be trying to keep below the 7% yield number with tomorrow's sale. Greece had to seek a bailout just over a week after its bond issues went through that number. Ireland lasted less than a month. Although all countries are different (to be frank, unless Portugal gets its act together and its books in balance, it could be borrowing at 6% and still be in deep fundamental trouble – the point is, at 6%, there's still belief in the 'bigger fool' theory, while at 7%+ that belief begins to evaporate).
The statement by Japan that it would buy bonds in a central bailout fund is the most interesting (as are most things that involve the far east economies). Where, one might ask, are Japan and China coming from here? What's their agenda?
Well, one thing we can rule out is that the decision is based purely on the profit motive. There are deeper forces at play.
The most obvious reason would be that any bailout-fund backing would be anti-dollar rather than pro-euro. It might seem odd for China, a huge holder of US dollars, to make an "anti-dollar" move, but the fact remains that it does not want the dollar to be the only game in town when it comes to reserve currencies. Therefore it wants the euro to survive and, if possible prosper. The paradox here is that we have one obvious replacement alternative reserve currency in the Yuan, but China will not allow that to happen?
For why? Because the period when a country moves from being the producer of a non-reserve currency to one of being the producer of a reserve currency is one of milk and honey for the general population. You just print money and other countries pay you real things so that they can store that money in their vaults. This is most definitely not what China wants. A rapidly rising standard of living would cause political instability that is anathema to the Chinese leadership. Therefore the Yuan must not be allowed to become a reserve currency.
That kind of causes unknown problems for the global economy, because there have only been two fiat currencies that have taken on this role in the past three hundred years – the pound sterling and the US dollar. And in both those cases it was a case of the laissez-faire markets being allowed to do their work. What will happen when the producing country says "no go"?
But that's by the by. The fact is, China and Japan have suddenly become euro-fans because they want an alternative super-currency. But they wouldn't do this if they thought that the euro was going to go tits up anyway.
So there's a mixture of motives at play here. China wants influence in the peripheral euro countries – what better way to do that than to invest there? This is already happening in Spain to an incredible degree. China and Japan also want the euro to survive, and the willingness of Japan to back a bailout fund indicates to me that this is the old Axis at work – Japan and Germany working together, with Japan believing that, in the last resort, Germany will step up to the plate.
Will that work? Possibly not. Japan's analysis falls down in that it might be assuming that what the leadership in Germany wants, the leadership in Germany gets. And this is a long way from certain. However, it's certainly true that having China and Japan "on-side" in the "the euro must survive" campaign counts for a lot.
Portugal will still need a bail-out. Spain will still need a bail-out. But while there was no way that Germany could save the euro in its current form if it was acting alone within Europe (even if the leadership wanted to), if it had Chinese firepower backing it up, it quite possibly could.
But all of this comes at a cost. The Chinese are not philanthropists. What would be the quid pro quo? Or, as one wit observed recently – the way the current global imbalances are going, within 30 years China will be producing everything and everyone else will borrow money from China to buy it.
