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This post was edited by abramicus at 2015-6-29 03:04|
Come Monday, the remaining 45 billion Euros that Greece has at its disposal will run out in an avalanche of withdrawals. Come Tuesday, all commerce will stop as there is not enough currency or credit in the system to transact with.
I thought that the PBOC wanted China to play the role of a reserve currency for the world.
Well, here is its first challenge, and a doable one, provide Greece with enough loans denominated in Yuans, that Greece can the exchange for Euros in order to pay its depositors with, at least until July 5th. Possibly, by that date, Greece would have agreed to be bound in iron chains and links by its creditors, and will be willing to pay its debts to China by working for it in the coming years - unlikely to happen as it may be. Or, Greece would have decided to print its own money to pay its depositors with, at which point, it would have to peg the Drachma to the Yuan, which in turn would have to based on the exchange rate of the Yuan against the Euro, since the debts of Greece are denominated in Euros - this is more feasible and likely.
In either case, Greece gets a chance to breathe before doing its referendum.
This will cost China nothing, actually, because it has a surplus of Euros that are earning next to nothing in terms of interest, and here, Greece would be willing to pay it back with interest denominated in Yuans!
The key is for China to purchase 100 billion Euros overnight, and lend its equivalent to Greece in Yuans. This makes certain that the reserve currency of Greece, even for this short period of transition only, is in Yuans.
Given the following exchange rates:
1 Euro = 6.94 Yuan
1 Euro = 340.75 Drachma (establishing the Euro as the official currency of Greece on June 19, 2000, just a little over 15 years ago)
The exchange rate of the Drachma to the Yuan, if the Bank of Greece uses the original Euro-Drachma conversion rate for its new Drachma, should be:
1 Yuan = 48.99 Drachma.
Factoring an interest rate of 2.0%, paid upfront as a coupon, the initial conversion rate would simply be 1 Yuan = 50 Drachma.
If Greece has to pay China back its principal in one year, Greece would have to either have earned the same amount in exports to China, or convert its Drachma into other currencies, like the Euro, Dollar, or Yen, which can then be converted into Yuans, such that the value of the Yuan with respect to other currencies remains unchanged.
However, this transaction would have achieved two objectives, otherwise not achievable without it.
First, Greece's economy will not freeze up, and businesses would not have to close, while their workers would not have to be laid off - keeping intact Greece's means of production.
Second, China's excess manufacturing capacity will now find a ready market in Greece, and Greek products and services will have a ready market in China. Greece has to earn Yuans to pay off its debt by the end of the year, or otherwise, it would have to earn enough Euros, Dollars or Yens, which would be even harder, so Greece can export to China products or services, chief of which are its tourism services, and port facility services (without loss of sovereignty over the ports themselves), to add new legs to China's thrust to rebuild and extend the Silk Road and Belt into Europe and Africa. It merely provides an alternate route for trade to the southern part of Europe and the northern part of Africa by sea, that would be too difficult to negotiate by land.
A third benefit, unique to China, is that its artificially overvalued Yuan exchange rate could climb down from its high perch without having to reduce its interest rate or bank reserve requirement ratio at home, allowing its manufacturing sector to be revived. Obviously, if Greece uses its Yuans to buy Euros, the Euro will rise and the Yuan exchange rate will fall, to some degree.
Finally, China can make this a win-win solution by first buying up Euros on Monday on the cheap, to the tune of 100 billion or even 200 billion Euros, which it can then use to back up its extension of credit to Greece, for the same amount, denominated in Yuans. Just this arbitrage operation would generate a good profit overnight. The subsequent demand for Yuans by Greece, should it export instead to the Eurozone countries, will later on raise the exchange rate of the Yuan back to its present level, without causing contraction of China's manufacturing sector, because the net result of all of this is that the demand for Chinese manufactured products would have increased, in the Greek economy at least, if not in other countries planning to go back to their own sovereign currencies, like Austria, which is highly solvent. In this manner, the Yuan can truly become an international reserve currency without being limited to the 4% maximum of the SDR market, and the 6% maximum quoto of SDRs reserved for developing countries, breaking through the 2.4% barrier set by the IMF, which is at best a token, and at worst an albatross around the neck of the manufacturing sector of China.