Jim Willie: Greece Is China's US$ Swapping Facility

Greece is used as a conduit by China to dump US Treasuries to buy Euro, with which to by the Greek debt which will be backed by the mightly Germany. Thus the rapid and unwarranted appreciation of Euro, and politicians in Berlin and bankers in Frankfurt were caught flat-footed.

The Jackass, aka Jim Willie, made this observation in his latest free newsletter on October 20, 2010 [emphasis is mine]:

NEW DOLLAR SWAP WINDOW (MADE BY CHINA)

China is dumping USTreasurys by way of the Europe, using a back door whose design was handed to them. Their support of the Greek Govt debt jammed that door wide open. Thus the rising Euro currency without justification, one of a few factors. Usage of the window has led to an indirect Chinese forced devaluation of the USDollar, an extremely clever action. China has never appreciated being repeatedly called a currency manipulator. From 1999 to 2005, the USGovt gave full support to the Chinese Govt, as the Yuan currency was pegged to the USDollar. The USGovt saw the policy as providing stability to the USDollar at a time when foreign investment by US firms in the Middle Kingdom was brisk and strong. In a three-year period, the US multi-national firms invested $23 billion in Chinese industrial plants, like the 160 Wal-Mart plants. The misguided USGovt and hapless US economists eagerly awaited the great bounty from Low Cost solutions that exploited cheaper Chinese labor, lower tax structure, even absent regulations. A decade wave of corporate profits evaporated, amidst growing debt and the housing bust. Meanwhile, the Chinese Govt would accumulate $2.5 trillion in savings, held as USTreasurys for over $800 billion. Suddenly, China is a currency manipulator. However, the vast monetization initiatives enacted by the USGovt and its partner USFed with $1.5 trillion in freshly printed money to support the US$-based bonds which few foreign creditors wanted, that action is highly manipulative to currencies!!

The missing piece is that the Wall Street helm has ignited the currency bonfire by not pursuing a multi-lateral agreement by USGovt creditors. They have never been consulted on monetary inflation, debt monetization, and austerity measures. The United States acts unilaterally with great privilege, as they claim some of sort of glorified mission, a Manifest Destiny ridden atop bond wagons. The Chinese apparently have a plan to swap their USDollars for Euros, using the Greek back door.

A well placed banker source in Europe passed an opinion along. The Jackass was aware of the Chinese nibbling with purchases of Greek debt. However, the initiative had a clever motive for an expanded role. The German Euro supporters have been caught flat-footed, inattentive to guard the door. By refusing to permit a default in Southern Europe of sovereign debt, the Euro Central Bank and EU leaders have exposed a vulnerable pathway soon possibly to turn into a highway. The banker source wrote, "After having de-facto bought Greece, the Chinese are now members of the Euro system or Greece is now a member of two currency systems, to be used at will. So China will now use its USTreasury Bonds to buy Euros, which will be used to buy Greek Govt bonds. These bonds will be guaranteed by Germany. This is very clever and no one saw the dual usage of the system, except a few very clever people. The politicians in Berlin and bankers in Frankfurt were sleeping at the wheel as usual and now will pay a heavy price." It goes deeper. Greece has agreed to support EU recognition of full market economy status for China, while China has agreed to support the call by Greece for UN mediation over Cyprus.

The Chinese have essentially created a Dollar Swap Window, a small one admittedly. It will grow over time. Attempts to rein it in will be difficult. Imagine runaway traffic at the window, the galloping process of the Greek Dollar Swap Window. The Europeans eagerly opened the window for China to invest money in Greek Govt debt, which European nations did not want to commit to. So China has a small pipeline in which to shove USTreasurys, to convert them to Euros will full blessing and approval of the Euro Central Bank, and to buy a stake in Greece. Beijing could not give a dragon's big toe of concern for Greece. They wanted a window to dump USDollars. Next look ahead, and remain objective. The Chinese might be motivated to invest in Spanish Govt debt, some Portuguese Govt debt, and later some Italian Govt debt and even some French Govt debt. Leave Ireland alone, a lost cause, after a foolish decision to adopt the suicidal IMF austerity plan. They are headed toward systemic failure.

So China has found a clever back door Dollar Swap Window. So far it only has a Greek label on the glass with Greek trucks on the dock, with Chinese standing in line. Soon the Latin debt will open up adjoining windows in an expanded Dollar Swap Window facility. The USFed and USDept Treasury were not invited to this planned project. The key point upcoming is not the volume of European sovereign debt to be covered by China, even at discount in implied writedowns. The key point is other broader usage of the window. Watch and observe how the Chinese will eventually be accused of swapping far more USTreasurys through the window than purchased Greek Govt debt, or any other sovereign debt. The Chinese will attempt to dump as much USTreasurys as they can before the window closes, shut under pressure by the USGovt. In the meantime, the Euro currency rose to touch 141 per greenback unit two weeks ago. That is a rather impressive run from 127 in early September. The European fundamentals do not justify such a big 11% move. At 140 the exchange rate is still lofty. If the Chinese expand the usage of their clever new Dollar Swap Window, the Euro could rise to 150. Such is the heavy price paid by the EuroCB and EU leadership for refusing to permit a Greek Govt debt default. The Open Door Policy to China found a back door !!!

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