Joint ECB / Fed Action? Forget About It.

 |  Includes: FXE
by: Marc Chandler

Some press reports are linking the recovery in the euro to comments from Boston's Fed Rosengren who seemed to suggest that an intensification of the debt crisis could prompt a joint response by both the Federal Reserve and the ECB. Immediately people thought about intervention and/or coordinated easing. Don't hold your breath for it.

Rosengren quickly added, though not quick enough for headline readers, that Europe has the financial capacity to address the challenges represented by Italy, but need the political will. As powerful as the Fed may be, it does not have the strength to bolster the euro zone's political will.

This is not to say the Fed and ECB don't or won't cooperate. After all, there are the swap lines. And, many of the Fed's programs, during the 2008-2009 period but also more recently, as in QE2, seemed to benefit to a larger extent than many realize European banks. Under QE2 for example, the bulk of the excess reserves created have ended up on the books of foreign, mostly European, bank branches.

It is not clear what Rosengren had in mind, though it did appear to be part of the answer to a question rather than opining purposefully in a speech. The dollar swap lines are hardly being used. It would appear European banks are not experiencing a dollar shortage as they did earlier in the crisis. Some may have reduce their needs for dollar funding but selling off some dollar assets.

The same assessment largely applies to China as well. It is of course in every one's interest that the European debt crisis is resolved, but what can China reasonably do? They have money, you may quickly say. Yet this is more apparent than real in the sense that China has yuan, which are not convertible, so this money is not quite useable money, even if China wanted to lend it to Europe.

What about lending dollars out of its reserves? This is easier said than done as China's reserve are purchased through the issuance of bills. This would then would become an unfound liability for China and be a technical mess.

There are other things that may more more important to China. For example, having Europe recognize it as a market economy., which would make it more difficult to restrict Chinese goods. China also wants to internationalize the yuan. If the EFSF, which is soon to issue bills in addition to bonds, would issue yuan denominated paper, that is a different story, but as it stands now, with Europe having plenty of foreign assets that can be sold to take care of the debt, why should China ride to the rescue?

If Europeans are selling off European bonds, why should China buy them? If European officials want to insist on a 50% haircut on Greek bonds, but not regard it as a default, why should China get more involved?

The old summer palace in Beijing is left in ruins. It was burned down by the French and the British more than a century ago. China keeps it as the US keeps the USS Arizona: a reminder of how they have been painfully wronged. China will not rescue Europe, even if it could, without substantial self-interest and concessions.