Plagued by high deficits and a drop in its credit ratings, Greece has to raise money as quickly as it can to fund its national debt. According to the FT, is will try to market $25 billion euros in paper to Beijing. China has, as it likes to remind the world, $2.4 trillion in foreign exchange reserves.
China will probably take the Greek offer and get very high interest rates in exchange. The transaction may be a sign of things to come.
China should be able to extent its strategic financial relationships around the world by purchasing the sovereign debt of many troubled nations including Ireland and the Ukraine. The People’s Republic is in a position to bargain for good yields and gamble that these nations will not risk defaults on their foreign obligations.
China is already the most likely buyer of the hundreds of billions of dollars in US and UK debt that has flooded on the global capital markets due to the funding of large national deficits and will continue to do so.
If China did not exist, it would have to be invented. Without it, the worldwide market for debt would be so severely strained that even credit-worthy debt like that from the US would have to carry much higher coupons. China, almost single-handedly, allows sovereign nations to sell bonds and pay reasonably low interest rates.
The mystery about China’s appetite for foreign debt obligations is what the world’s most populous nation intends to do with all the IOUs it gathers from around the world. The most likely answer, at least for now, is that China intends to make money off the interest paid on all of this paper. A more sinister view is that, if the global economy remains slow, China will have unprecedented leverage with governments across the globe. And, these governments may need to give China access to raw materials or access to ownership in some of their largest enterprises as a manner of appeasement when the notes comes due.
Douglas A. McIntyre
Top Gaining Stocks
Top Losing Stocks