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China Warns US, Europe: We Can’t Save You

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Wednesday, 24 Aug 2011 05:30 PM Current | Bio | Archive

German President Christian Wulff issued serious warnings about the handling of the eurozone crisis.

“The banking sector is still fragile, public debts in the major economies are at record levels and in many cases, the fundamental problems hindering growth and competitiveness are as present as ever,” Wulff said.

“More time was gained than was actually used … we’ve neither dealt with the causes of the crisis nor can we say today that we’ve recognized the risks and done everything to minimize them,” he said.

“First, the banks rescued other banks and then states rescued banks, and now a community of states is rescuing individual states. But who will ultimately rescue the rescuers? When will the accumulated deficits be distributed among whom and who will shoulder them? … when the supreme guardians of the currency (The European Central Bank - ECB) go way beyond the bounds of their mandate and buy up government bonds on a massive scale – currently more than 110 billion euro (US$159 billion),” he said.

“In the long term, this can’t be good, and therefore it can be tolerated at best for a short period. The guardians of the currency, too, must quickly find their way back to the agreed principles. I regard the huge buy-up of government bonds of individual states by the European Central Bank as legally questionable.”

He said Article 123 of the Lisbon Treaty on the Functioning of the European Union prohibits the ECB from directly purchasing debt instruments in order to safeguard the central bank’s independence. “This prohibition only makes sense if those responsible do not get around it by making substantial purchases on the secondary market,” he said.

If you ask me, the German president is announcing big eurozone trouble/disagreements in the making…

All this comes after the German Central bank, the Bundesbank, said the tendency to take on new debt would weaken the institutional setting of the European monetary union (EMU).

“The latest agreements, which eurozone leaders agreed to at the Brussels’ summit on July 21, mean that far-reaching extra risks will be shifted to those countries providing help and to their taxpayers, and entail a large step towards a pooling of risks from particular EMU states with unsound public finances. The EU summit deal threatens the principle that elected parliaments should control budgets.”

The report also says the scheme leaves creditor states with escalating “risks and burdens” while there are yet no means in place of enforcing fiscal discipline to make this workable.

Also, there are no plans as yet for EU treaty changes to correct these distortions. “Unless there is a fundamental change of regime involving a far-reaching surrender of national fiscal sovereignty, it is imperative that the ‘no bail-out’ rule – still enshrined in the treaties – should be strengthened by market discipline, rather than fatally weakened.”

Time will tell if the Germans will cave in on their principles and laws… I wouldn’t bet on that, but that’s of course my personal opinion.

In the meantime we see Greek 2-year sovereign debt yielding about 44 percent Wednesday morning… No, that’s not a good omen!

So, besides all that it should not come as a surprise that Xia Bin, an academic adviser to the People’s Bank of China, stated: “The Chinese government is certainly worried about the safety of its foreign exchange reserves ... China should reduce the portion of financial assets in its reserves and increase the portion of non-financial assets … China should use its reserves to buy overseas energy, resources and equity instead of buying more euro-debt.” Very importantly he also warned that the U.S. and Europe couldn’t count on China to “save” them.

Interestingly China's leading official newspaper likened on Monday the eurozone debt crisis to the “Black Death” and Chinese Vice Foreign Minister Fu Ying, who is responsible for China's relations with Europe, said: “Recently my colleagues and I have discussed the European Union's future. Everyone's basic viewpoint is that if European countries can hand-in-hand resolve the problems, the European Union will continue to progress and further integrate, otherwise the eurozone could collapse.”

Also, we will have to wait and see if Fed Chairman Ben Bernanke’s Jackson Hole, Wyoming, speech will announce anything of what could be considered as positive while, unfortunately, nothing good can be expected out of Europe in the next couple of months.

Because of all this, my preference remains full “risk off.” In my opinion, investors should remain patient and remain in “cash equivalent” instruments.

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HansParisis
German President Christian Wulff issued serious warnings about the handling of the eurozone crisis. The banking sector is still fragile, public debts in the major economies are at record levels and in many cases, the fundamental problems hindering growth and...
parisis,China,euro,US
746
2011-30-24
Wednesday, 24 Aug 2011 05:30 PM
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