Duncan’s Economic Blog

China to solve the Eurocrisis: We’ve heard this before

Posted in Uncategorized by duncanseconomicblog on September 13, 2011

The past 24 hours have seena lot of comment on the notion that China (holder of $3.2 trillion of foreign exchange reserves) may intervene to buy Italian government bonds, providing vital support to the market.

I’m not holding my breath, mainly because this all seems very familiar:

October 2010 – China pledges to buy Greek bonds

December 2010 – Portugal asks China to buy its bonds

January 2011 – China backs Irish bailout

January 2011 – China promises to buy Spanish bonds

For the last two years the Euro-Crisis has worked to a familiar script, roughly put is goes something like this:

Government denies it is in trouble, government passes austerity package, growth slows, deficit either widens or refuses to come down, bond yields increase, government denies a bailout is coming, bond yields rise, EU authorities deny a bailout is coming, more austerity, deficit still high, bond yields hit 6%, talk of Chinese (other Asian) support, EU ‘rescue’ agreed at last moment – in reality just kicks the can down the road, more austerity, deficit rises.

It looked a few weeks ago like the ECB might have broken the circle by heavy intervention in the Spanish and Italian debt markets. I speculated a month ago that this wasn’t panning out to plan.

Post the resignation of Stark, and the rise of Italian yields to back about 5.7% it looks like we are back on script.

The problem is that Eurozone leaders are running out of road to kick the can down.