Today Wen Jiabao, the Premier of China, announced that China has offered to buy embattled Greece’s debt. Media outlets (like CNBC) are already portraying China’s offer as China coming to the rescue of Greece. However, some details emerging after Jiabao’s announcement suggest this potential arrangement between China and Greece is nothing resembling a rescue…
- Jiabao proclaimed that China has already used some of its vast foreign exchange reserves to purchase Greek debt. This is probably true, but it’s unclear whether China bought Greek debt before the crisis in Greece began. If China bought Greek debt before the crisis began then Jiabao's statement is utterly meaningless...
- There are no details yet about how much China would be willing to commit towards its purchasing Greek debt. Thus, we have no idea if China is actually serious about committing a substantial sum of money to buy toxic Greek debt.
- A $5 billion fund will be established to help Greek shipowners purchase Chinese-made ships. I'm sure Greek shipbuilders are fuming over this detail since Greek government may soon allow the Chinese shipbuilders to take away their business with a special seller financing program.
- Reuters referenced a senior Greek government official who said that Jiabao told Greek officials that China wouldn't actually purchase new debt from Greece until Greece begins to issue bonds again. This is an important detail because Greece is unlikely going to be issuing new bonds until next year at the earliest (they’ll just live off of the IMF/EU bailout money for the time being). Thus, China isn’t committing any money upfront in this deal.
China likely made the offer to gain positive press, flex its economic power, potentially earn a high rate of return, and potentially gain some benefits we probably won’t hear about in the media. Meanwhile, Greece may accept China’s offer in hopes it’ll give investors the confidence to hold onto its debt and the confidence to buy new debt when it is issued. Greece probably hopes that investors will think: “It’s safe to own Greek debt because China is willing to finance Greece if it encounters financial trouble”. Increased investor confidence may enable Greece to pay lower interest rates on the new debt it issues in the future.
This potential arrangement between China and Greece would not solve Greece’s problems in the long-term. Greece has too much debt and an economy that is broken. In addition, the Greek government may not survive much longer if it imposes further austerity on its angry and restless citizens. This potential arrangement may delay Greece’s default on its debt and the subsequent global financial turmoil that would result from that, but it is unlikely going to stop Greece’s default from taking place eventually.
