The financial implosion in Europe reached a new chapter this week with both China and Japan stepping forward to buy bonds from EU or EU rescue funds. The export markets have showed up with cash in hand. Importers can rejoice, funds have arrived. That’s the good news, the bad news is the same issues. Europe is relying on its vendors to keep the party rolling.
Vendor financing is one of the last stages of a blow off bubble in overallocation of capital. We have a snake eating itself and discussing how good the meal tastes. This won’t end well. The ability to kick the can down the road, is rapidly shrinking. The half life of how long a special interventions lasts is dropping. This wont continue long. There is no “Shock or Awe” in the actions taken at this point.
The interesting aspect of the Chinese purchase is that it is rumoured to be a Sovereign 144 private placement. That is, China and the Sovereign in question, will do a deal in private where the details are not subject to public transparency. This allows the Sovereign in question to raise funds with out the Bond Vigilantes adjusting the selling prices.
They really don’t have a choice. China needs Europe as a stable source of demand as much or more than any one else does. If Europe were to have a major economic dislocation event, Asian exports would be significantly hurt.
Europe has reached the stage where it is unable to fund itself anymore and this is becoming obvious to everyone. The list of fail points have reached critical mass.
The bond vigilantes have more ammo to fire, while the *REAL* pool of capital available to Sovereign risk shrinks each week. The Chinese Vendor private placement will work this time, but it is not going to correct the problems in the EU financing structure.
Europe is China’s biggest export market, and with out some more financing from somewhere, China is looking at taking a real hit to demand. The last thing China needs is their primary partner going bankrupt, leaving China with raging internal inflation and no healthy export market.
Which brings us to Japan with the highest GDP/Debt ratio amoung the developed nations. Japan has a currency that is too strong for the good of their nation. It is killing the domestic production due to export exchange rates. The obvious solution is to flood the world with Yen, to lower the ratio of Yen to dollars.
This should stimulate the Japanese economy as its currency takes a hit to the other currency crosses. The most obvious way to do this would be to print new Yen’s for the European investments, and flood the currency markets with new supply. The more Europe needs, the more Japan prints, the more Yen that hits the FX markets.
It is becoming blindingly obvious, we have a group of drunk debt issuing bureaucrats who are all trying to prop up each other, so the game can continue. Sadly the music has stopped playing, and there is not enough chairs for everyone to stumble towards. This is where things start to get interesting.
You can not print up confidence…
The world needs real capital, not electronic credits available to a few, on the whims of even fewer people.
Filed under: Communications, Currency, Debt, Derivatives, Economics, Europe, Global Macro, International, Uncategorized, Yield Tagged: Cash for Debt, China, EU, Europe, Financial Shock & Awe, Japan, Vendor Financing, Yen