European Bailout Fund Could Issue Yuan Bonds, Regling Says

The euro area’s bailout fund could at some point issue bonds denominated in the Chinese currency, Chief Executive Officer Klaus Regling said in Beijing today.

“We are authorized to use any currency we want if it seems efficient so we may one day issue in U.S. dollars or renminbi,” said Regling, head of the European Financial Stability Facility, using another name for the yuan. “It depends whether the Chinese authorities would approve of that. I could imagine that over the years that might happen, maybe not immediately but maybe one day,” he said.

European leaders are seeking financial support from China, holder of the world’s largest foreign-exchange reserves, for an enlarged rescue fund aimed at containing the region’s sovereign-debt crisis. Vice Finance Minister Zhu Guangyao said yesterday his government wants more details about the “technicalities” before making any decision on investment.

Regling said yesterday that China, which has been a “good” and “loyal” purchaser of EFSF bonds so far, hasn’t set any conditions for buying more of the securities.

While China is the world’s second-largest economy, its currency isn’t freely convertible for investment purposes. Global investors have limited access to bonds and other yuan-denominated investments inside the country.

The central government has been encouraging greater use of the yuan overseas, notably in Hong Kong, and boosted trade settlement agreements and currency swaps with Asian nations to create more channels for it to circulate offshore.

Investor Protection

As one step towards boosting the global role of the yuan, French President Nicolas Sarkozy -- current head of the Group of 20 - wants the yuan included in the International Monetary Fund’s Special Drawing Rights system. The SDR is a unit of account derived from the value of the dollar, yen, pound and euro used in IMF lending and currency reserves.

The EFSF is exploring whether to create a special purpose vehicle within the IMF as a channel for money for the enlarged rescue fund, Regling said yesterday and Zhu said the Chinese government wants to know details such as how the senior-debt portion would be structured.

The EFSF will take the junior tranche of debt sold by the vehicle, Regling said today at a forum at Tsinghua University.

“If something goes wrong the first loss would be carried by the EFSF that would be around 20 percent,” he said. “If other investors join this SPV they know they would only incur a loss if a certain investment loses more than 20 percent. So that’s the protection,” Regling said.

Greece’s exit from the euro would be “an economic disaster” as its exchange rate would be quite weak and debt denominated in euros or other international currencies “would shoot up and probably become unserviceable,” Regling said.

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