The Greek debt crisis and China
Updated: 2011-07-07 14:17
By John Ross (chinadaily.com.cn)
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The overwhelming majority of international analysts on the issue are also aware of the inevitable default. They are merely divided between those who believe default should occur now or whether it would be better to postpone it. So far European governments are, with little credibility in markets or among serious analysts, proclaiming that partial default is "unthinkable" - which means in practice they are going down the road of postponement.
Clarity is therefore necessary on the purpose of the postponement and what is taking place during it. The core process is to give time for European and other banks to exit from holdings of Greek debt and transfer it to governments - which in the real world means taxpayers. The latter will therefore pick up the eventual bill when the partial default comes. This is why there is strong public opposition to the European Union’s bailout plans not only in austerity-hit Greece but in creditor countries such as Germany.
The eventual division of losses between European banks and European taxpayers is evidently not China's affair. But China is being asked to pick up the bill for its taxpayers when the eventual default comes. The mechanism of this is that an eventual Greek default will have consequences not only in that country but across Europe. China's government is being asked to buy, and indeed is buying, bonds in some European countries on terms that are therefore likely to be worse after a Greek default.
This is not at all necessarily the wrong thing to do. It may be that the overall benefits of participating in a deal to postpone Greece's default, which presumably will also make it more orderly, outweigh any direct financial losses to China that will be incurred by a partial default. That is a matter for China's government to assess.
But it is necessary to enter such a process with eyes open and not believe partial default will be avoided. China's economic policy makers have on numerous occasions shown they are experienced enough to calculate whether the overall benefits of participation in a scheme to postpone Greece's default outweighs the financial costs. But that calculation needs to be made on the assumption of an eventual, at least partial, Greek default.
John Ross is Visiting Professor at Antai College of Economics and Management, Shanghai Jiao Tong University. From 2000 to 2008, he was then London mayor Ken Livingstone's Policy Director of Economic and Business Policy. The views expressed here do not necessarily reflect those of the China Daily website.