Sunday, July 5, 2015

Greece, China, and Russia – a Plan B for Greece

If the Greeks were to vote ‘No’ what would happen next?  Well no one can say. But here is a quick thought on what I hope the Greek government might have been exploring if they are excluded from the euro. It’s just food for thought nothing more.
They have to be prepared to have a currency that does not depend on Europe supplying Euros. So they will need another currency – hopefully their own.  I think we can be sure no western company has been printing them. There are few such companies and there is, I think, no possibility that they would be able to keep secret a contract from Greece.  But both Russia and China can print notes. So would it not have been prudent to ask Putin to print up plane loads of Drachma and be prepared to fly them in?
Who would back this currency?  Greece is not Great Britain with a long established reasonably trusted currency backed by a big slice of global financial trade. So I do not think they could launch an orphan currency which the drachma would be if it did not have some relation to a major clearing or reserve currency.
For all Obama has, apparently, lobbied the EU to be more conciliatory towards Greece I am not sure he would leap at the chance to help Greece with its debt. He might of course. A chance to reenforce US power in that part of the world. But he already has power there so I doubt he would be willing to ‘pay’ much. Russia and China, however would gain much more by having Greece as a beach head in to the EU and, more importantly, into Nato.
Russia  has already signed a large gas pipeline deal with Greece. The deal will make Greece the European terminal for the  so-called TurkStream which would be a southern counterpart for the NordStream which runs under the Baltic and has its European terminal in Germany. This pipeline would bring Russian gas to Europe cutting out Ukraine. A nice end run around the Western puppet government/influence in Ukraine (you decide which one you prefer).  It will also bring closer Russian ability to pipe gas from further east and from Iran. Which would also be an end run round the southern front of the Great Gas War being fought in Syria.
Earlier this year Russian also signed a deal with Cyprus to give Russian ships access to Cypriot ports.
So It would make sense to me that Russia might see advantage in helping Greece in the event of a ‘No’ vote.  But I do not think Russia is in much of a position to help financially. Their help can be practical and trade in gas and their reward is military. Greece and Cyprus together could perhaps get themselves a chip in the big game by being the key to allowing Russia to project military power in to Nato.
Which raises the intriguing possibility that Russia might ask Greece is they could station some military hardware in Greece. Not something Greece would lightly say yes to. BUT if there was a ‘no’ vote and then Europe tried to get really vindictive or even started sabre rattling about ‘radical’ possibly ‘illegitimate’ leftist governments (AKA Syriza) might Syriza gain some advantage by letting it be known they might consider letting Russia dock missile carrying warships in their ports, or allow certain early warning systems on their territory? Or if  the Great Gas War, which is surely the new Cold War, where Ukraine is the new Germany divided East and West (all we need now is a wall somewhere), heats up and the US does deploy missile systems there, would Russia think it advantageous to befriend Greece so they could ask an indebted Greek government to allow Russia to retaliate with missiles right in the heart of Europe?
I realise this is pure speculation but it’s fun and I think it’s good to think the unthinkable now and again. Our leaders regularly do the unthinkable. We should at least think it.
Anyway, I can see reasons why Russia would think it to their advantage to help Greece and have favours to call in.
Then there is China.  China is too far away for military pretensions in the Med. Better to leave that to Russia. What China has is money. Just yesterday the director of the Quantitative Finance Department at China’s Institute of Quantitative and Technical Economics, Mr Fan Mingtao, said in an interview,
“I believe there are two ways to give Greece Chinese aid. First, within the framework of the international aid through EU countries. Second, China could aid Greece directly. Especially considering the Silk Road Economic Belt and the Asian Infrastructure Investment Bank. China has this ability,”
I don’t know if this is pure kite flying but it’s interesting. The Asian Infrastructure Investment Bank (AIIB) is a China led rival to the US led World Bank. America was very against it and hugely put out when various European and other countries defied America and merrily joined it. Led by Britain which is a founder member. This is a major step in China’s policy of projecting power abroad but also a major step in its campaign to either have the Yuan as a new reserve currencyor position a new currency in which China and the Yuan are constituent backers.
Again this is all speculation. But China is sick of America excluding it from governance of the World Bank and the IMF. Plus China will soon need – not just want – but need the Yuan to be at the very least a much more widely used settlement currency if not a full blown reserve currency. The reason I suggest this, is because of China’s ballooning domestic debt problem.  Back in 2011 I wrote about the way regional governments were largely outside of direct and effective central control particularly their issuance of debt (Making the New Sub Prime – Backdoor to China) and how that debt was going bad (China – 10.7 trillion Yuan of debt going bad).
That analysis is, I think, now vindicated. That regional debt has now blow up and is on the point of taking many of China’s banks down with it. The central chinese government now has, I think, little choice but to backstop all that regional debt.  The hope is that this will  save their regional governments from defaulting and also bail out all the banks that are holding that debt and would be bankrupted by such a default. Essentially this is a colossal bank bail out much like they were obliged to do back in the 90?s and we did a decade later. I am not alone in thinking this is the dynamic at play. As reported in the Wall Street Journal and ZeroHedge,
“The debt swap is effectively a debt restructuring for banks,” said Zhu Haibin, J.P. Morgan Chase & Co.’s chief China economist.
How big might this bail out get?
Because the central government is ultimately responsible for guaranteeing local government debt, and because yields on the new muni bonds are so close to those on treasurys, the newly issued local government bonds are really just treasury bonds, meaning that, in essence, the supply of Chinese government bonds is set to jump by CNY2 trillion in the coming months. If all of the local government debt ends up being refinanced, the end result will be the equivalent on CNY20 trillion in additional treasury supply.
What I foresee is that China’s new regional debt and bank bail out is forcing it in to what is essentially QE. The flow of Yuan is going to be vastly increased. A good idea would be to have lots of people ‘need’ these yuan and be keen to soak them up. That is what would happen if the Yuan becomes a new reserve currency or, failing that, if there is at least a greater use of the Yuan as a settlement currency for major international trades.
Which brings me to my speculation about Greece and the report quoted above about China helping Greece via the new AIIB.  Might it not suit China, with its coming flood of new Yuan, to offer Greece a hand with a few Yuan. Greece might offer to conduct all its foreign trade in Yuan rather than dollars or Euros. Greece would benefit because it would not be beholden to America or Europe for a flow of their currencies. It could look to China instead. Russian would be happy with this because it has a settlement agreement with China. Any gas pipelie work could be financed in Yuan with chinese government backed Yuan loans. The AIIB could help Greece out with a loan to allow it to operate. Such a loan would not be blockable from Europe or America. Greece could default and still have operating money. China could spin it as almost humanitarian aid: The Chinese people reaching out to the desperate, impoverished but brave Greeks when the wicked capitalist Europeans would not.
Greece would survive, have new powerful friends, have bargaining chips that neither Europe nor America could ignore , China would have projected the use of the Yuan right in to Europe and Russia would have more than a toe-hold for military power right inside Natio.
If I was Tsipras or Varoufakis I would be on the phone right now.

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