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The “China Bluff”

Nick Rowe has a short comment on the news that EU’s rescue fund the European Financial Stability Facility (EFSF) will try to tempt China to put money into the rescue fund by issuing bonds in Euros.

It is hard to disagree with Nicks’ comment: “The whole Eurozone problem is that each Eurozone country was issuing bonds in what was effectively a foreign currency, and so it lacked an effective lender of last resort. Now, if the Telegraph is correct, the Eurozone as a whole is planning to repeat the mistake, and become just like Greece.”

But that is not really what I want to comment on, but rather Nick’s comment reminded me about what we could call the “China bluff”. Since 2008 every time a bank or a country gets into serious trouble and is on the brink of collapse a CEO or Finance Minister or even a Prime Minister will say that some wealthy investor will soon throw money into the “project”. Most often these promises of “new money” coming in turn out to be far fetched fantasies.

The Icelandic collapse in 2008 maybe the most stunning example of the “China bluff”. At that time it was not China, but rather Russia that would come to the rescue of Iceland and the Icelandic banking sector. As the entire Icelandic financial system was collapsing suddenly Icelandic officials announced that Russia would step in with a loan to help Iceland and judging from the comments one was led to think that the Russian government already had agreed to a substantial loan to Iceland. However, the whole thing turned out to be a “China bluff” – an attempt by official to turn around market sentiment by promising that a wealthy investor would save the day. We all today know that Iceland had to call in the help of the Nordic countries and the IMF to avoid a default – Russian money was nowhere to be seen.

My recommendation to investors and the like is therefore that every time an embattled bank or nation “promises” money from China, Russia or the Middle East be skeptical…VERY SKEPTICAL. It might just be the China bluff.
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Update: Marcus Nunes also has a comment on the EFSF-China story.

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