The Greek debt crisis and China
By John Ross (chinadaily.com.cn)
Updated: 2011-07-07
It is another sign of the growing international impact of China that its economic strength has become part of the discussion on how to resolve Greece's debt crisis. It was also for this reason that Wen Jiabao's recent European visit received even more extensive than usual coverage in the continent's media.
The visit, in overall impact and in two of its three destinations, appears to have been mostly successful. In Germany, contracts worth $15 billion were signed. In Hungary, China's announcement that it would include that country in its international bond purchases was described by its government as "a decision of historic significance."
In Britain, there was a sour note when David Cameron wasted time trying to lecture China on human rights - which came rather ridiculously from the government of a country that participated in invading Iraq, resulting in the deaths of several hundred thousand people. But even in the UK, $2 billion in trade agreements were signed - although David Cameron did jeopardize British citizens' jobs and incomes because, as the Financial Times reported: "a senior Chinese official told the... FT that the UK 'is losing its standing in Europe as far as China is concerned and that Britain is now viewed less favorably in Beijing than Germany, France, Italy and Spain.'"
There are clearly two aspects to the aftermath of the visit. The first is overall economic relations between China and Europe. The second is the specific problems of China's exposure to the Greek debt crisis.
The overall success of the trip, and of economic relations between China and Europe, were well summed up in an editorial on July 2 in The Economist - Europe's most influential business magazine: "Investment bankers there [in Europe] are now sure to dial Chinese clients if they hear that a firm is a possible bid target. China's banks are rapidly increasing their presence in Europe... Chinese direct investment abroad has increased faster in Europe than in any other region.
"The Europeans get more than just money. A Chinese partner is a good way for a European brand to gain access to the world's soon-to-be-biggest economy. Ask France's Club Med, which now has a big Chinese shareholder and recently opened its first holiday resort in the country. Or CIFA, an Italian construction equipment maker whose products are now marketed as a premium brand by its Chinese owner. Or Sweden's Volvo, which was bought by Geely, a Chinese carmaker, in 2010 and now calls China its second home market." The magazine concluded its editorial: "In welcoming China, Europe is swimming with the tide of history. America is struggling against it."
The Greek debt crisis is, however, a specific issue that needs to be carefully analyzed. Greece's debt next year is projected to reach 159 percent of GDP, its interest rates are 15 percent above German equivalents, and its balance of payments deficit is 5.5 percent of GDP. This combination is totally unsustainable. A starting point has to be that the present bailout packages are not going to work and in the end Greece will have to partially default on its debt - to the disadvantage of its creditors.
The overwhelming majority of international analysts on the issue are also aware of the inevitable default. They are merely divided between those who believe default should occur now or whether it would be better to postpone it. So far European governments are, with little credibility in markets or among serious analysts, proclaiming that partial default is "unthinkable" - which means in practice they are going down the road of postponement.
Clarity is therefore necessary on the purpose of the postponement and what is taking place during it. The core process is to give time for European and other banks to exit from holdings of Greek debt and transfer it to governments - which in the real world means taxpayers. The latter will therefore pick up the eventual bill when the partial default comes. This is why there is strong public opposition to the European Union’s bailout plans not only in austerity-hit Greece but in creditor countries such as Germany.
The eventual division of losses between European banks and European taxpayers is evidently not China's affair. But China is being asked to pick up the bill for its taxpayers when the eventual default comes. The mechanism of this is that an eventual Greek default will have consequences not only in that country but across Europe. China's government is being asked to buy, and indeed is buying, bonds in some European countries on terms that are therefore likely to be worse after a Greek default.
This is not at all necessarily the wrong thing to do. It may be that the overall benefits of participating in a deal to postpone Greece's default, which presumably will also make it more orderly, outweigh any direct financial losses to China that will be incurred by a partial default. That is a matter for China's government to assess.
But it is necessary to enter such a process with eyes open and not believe partial default will be avoided. China's economic policy makers have on numerous occasions shown they are experienced enough to calculate whether the overall benefits of participation in a scheme to postpone Greece's default outweighs the financial costs. But that calculation needs to be made on the assumption of an eventual, at least partial, Greek default.
John Ross is Visiting Professor at Antai College of Economics and Management, Shanghai Jiao Tong University. From 2000 to 2008, he was then London mayor Ken Livingstone's Policy Director of Economic and Business Policy. The views expressed here do not necessarily reflect those of the China Daily website.
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Opinioni in giro per il mondo.
