NOTES about EFSF - I've read before that the EFSF is permitted to issue bonds denominated in currencies other than the euro, but the governments of the euro zone states have promised to provide guarantees denominated in euros, and I doubt that all 17 national parliaments have passed laws authorizing their governments to provide guarantees denominated in any other currency and laying down conditions for them to do that, especially regarding the applicable exchange rate“We have so far only issued euro bonds but we are authorised to use any currency we want if it seems efficient,” Klaus Regling, chief executive of the European Financial Stability Facility (EFSF), said. "It also depends on the Chinese authorities, whether they would approve that. I think it is probably more difficult. But I could imagine that over the years it might happen," he added. China has the largest foreign exchange reserves in the world, valued at $3.2 trillion (£2 trillion) . Mr Regling also said that investors may be protected against a fifth of any initial losses. “The EFSF will take a certain tranche that will be a junior tranche, which means if something goes wrong, the first loss will be carried by the EFSF. It could be around 20pc,” Mr Regling said in a speech at Tsinghua University. "To fulfill its mission, EFSF issues bonds or other debt instruments on the capital markets. EFSF is backed by guarantee commitments from the euro area Member States for a total of €780 billion and has a lending capacity of €440 billion."
Therefore if I was the responsible person in the Chinese government, or indeed any other investor who might be interested, I would be looking ahead to how the yuan-euro exchange rate might change during the lifetime of the bonds denominated in Yuan. To the extent that I anticipated that the yuan would strengthen against the euro, I would also anticipate an effective weakening of the euro denominated guarantees of yuan denominated bonds. To take a simple illustration, if I anticipated that the value of the yuan would double against that of the euro then I would calculate that if the EFSF only issued bonds denominated in yuan then the effective value of the €780 billion total guarantees would be halved, meaning that its effective borrowing and lending capacity would be halved from €440 billion to €220 billion. And if the EFSF is expected to provide guarantees to assist a second SPV or SPIV to borrow much larger sums, anything which erodes the effective value of the guarantees provided to the EFSF by the eurozone state governments must also erode its capacity to provide guarantees to that larger SPIV.
Therefore if I was the responsible person in the Chinese government, or indeed any other investor who might be interested, I would be looking ahead to how the yuan-euro exchange rate might change during the lifetime of the bonds denominated in Yuan. To the extent that I anticipated that the yuan would strengthen against the euro, I would also anticipate an effective weakening of the euro denominated guarantees of yuan denominated bonds. To take a simple illustration, if I anticipated that the value of the yuan would double against that of the euro then I would calculate that if the EFSF only issued bonds denominated in yuan then the effective value of the €780 billion total guarantees would be halved, meaning that its effective borrowing and lending capacity would be halved from €440 billion to €220 billion. And if the EFSF is expected to provide guarantees to assist a second SPV or SPIV to borrow much larger sums, anything which erodes the effective value of the guarantees provided to the EFSF by the eurozone state governments must also erode its capacity to provide guarantees to that larger SPIV.
4 comments:
Well, that confirms my view that the Eurocrats don't know what they are doing!
Issuing in a foreign currency is the last thing you want to be doing. Especially one that is artificially weak. It's a recipe for a first class mess and eliminates the one option a central bank has to avoid default, which is to print money.
Have they learnt nothing from Argentina?
A case of 'would you like chocolate buttons - or smarties?'
This is just another stage in the Federalistas' con - money created from nothing, or else money borrowed backed by nothing.
May I say the Zhanglan comments are the most on the ball of all for a change
more fool you if you don't see what's going on here - this is no more than a shallow pretext to further EU fiscal integration - condition people to believe that the situation really is that bad, and then they will feel relieved and grateful to accept the "soft" alternative you wanted all along - an EU superstate controlled by an unelected clique
it has come to the point of begging from china ! what a sad state of financial and political affairs. unlimited greed has eventually broken the back of the once great nations.
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