A wonderful chart courtesy of the Council on Foreign Relations depicting what I described several weeks ago: Since announcing its renewed commitment to currency flexibility in the days leading up to the G20 summit, the appreciation of the yuan has been more symbolic than substantive…

click on the chart for a crisper image, or visit China’s Head Fake

As I wrote several weeks ago (see Currency Manipulator):

China’s strategy of publicly announcing a more flexible yuan policy in the days leading up to the G20 summit effectively deflected the debate away from the yuan. What’s more, China’s announcement was seemingly rewarded by a Treasury now more reticent to label it a currency manipulator.

The interesting thing to me about the whole thing is that the yuan has barely budged since the announcement, rising less than 1% since late June. For a currency that some claim is undervalued by as much as 40%, that’s not likely to make much of a dent in persistent trade imbalances.

According to the CFR

In the run-up to the June G20 summit in Toronto, China came under significant U.S. pressure to loosen its currency peg to the dollar…Then one week before the summit, China announced that it would relax the peg, and indeed the renminbi (RMB) began to rise. The political tension dissipated. Yet since July 2^nd, five days after the summit, the RMB has ceased rising.

Taking stock then, China’s most recent flexible yuan policy announcement seems to have been wildly successful. It quelled political criticism. It effectively avoided having the yuan become a topic of discussion at the G20 meetings. And it was rewarded by both the Treasury and the IMF, neither of which labeled it a currency manipulator in post-G20 currency assessments – opting instead for the much more benign label “undervalued” (see the Treasury’s Interim Report on Exchange Rate Policy and IMF Yuan Debate).

So in effect, China’s cheap talk has worked, …so far. The nagging question for US policymakers: Now what??

For those of you who read my blog, you know that I’ve had an interest in Tata’s acquisition of Jaguar and Rover. When it was announced, I failed to see the value proposition in the combination of Tata and JLR, and I remain somewhat skeptical of JLR’s ability to provide value to Tata (for background see Jaguar/Rover Revisited, Jaguar/Rover Update, and Buyer’s Remorse).

Irrespective of my opinion, it was with great interest that I read this week’s Economist, which contained an article on Tata’s progress with those previously beleaguered brands (see Tata Motors’ Boss Moves Up a Gear).

After a torrid couple of years in which demand for JLR’s pricey models evaporated…2010 has seen at least a partial recovery in sales and profits…

After the success of the mid-size XF and with heavily revised Range Rovers and the radical new XJ saloon just launched, JLR’s product line-up has never looked in better shape.

MY COMMENT: I will give that to them. Tata Motors is performing better now than in 2009. They are profitable again, with net income of around $550 million. However, a look under the hood suggests that profitability was not bolstered much by results at JLR (Jaguar Land Rover). A good chunk of Tata Motors’ profitability came from a gain booked on the partial sale of Tata’s stake in Telco Construction Equipment. JLR’s net profit was reported at around $20 million. That’s very small (less than 5% of total profit for a brand that represents greater than 50% of Tata’s entire automobile enterprise), …but it’s admittedly greater than zero.

Another thing that I will say about Jaguar and Land Rover: Their new models are stylish. They are good looking cars. And boy have they been marketing the heck out of them in the US. Everywhere I turn I feel like I see/hear another JLR advertisement – on TV, radio, billboards, and even through the internet (e.g., pandora radio). This is more than I ever remember Ford promoting those brands.

So Tata Motors is definitely making the investment. The question remains: Will the pricey advertising campaigns pay off, or are the brands already too far gone??

Nevertheless, I will admit there are definitely some things for the optimists to get excited about.

Back to the article:

One of the biggest puzzles Mr Forster [the Chief of Tata Motors] has to solve is how to replace the legendary Land Rover Defender…The new vehicle will have to be cheaper to make (and sell) than the current “Landie” to make it competitive with Japanese rivals in developing-country markets…[and] come up with a product capable of finding at least 80,000 buyers a year—four times as many as the current Defender. There is a good chance that, to keep costs down, the new model will be made in India.

MY COMMENT: Um wait. From what I remember of the original deal, Tata agreed not to shift production out of the UK, and made pledges not to cut staff or close plants. It’s unclear to me therefore how many of those 80,000 cars they’ll be able to assemble in India.

The new-model blitz is in impressive contrast with the sluggish pace of development under JLR’s cash-strapped previous owner, Ford.

MY COMMENT: Yes, I agree the new models (especially the Jaguar XF/XJ and the Land Rover Evoque) are impressive. However, lest we forget, these models were designed and developed under the previous owner, Ford. What matters most is what comes next, …in the generation of models that follow. We’re still several years away from seeing the fruits of any design efforts under Tata Motors.

And one of the big takeaways from the article:

Apart from economic uncertainty in its traditional markets, there is, however, one big cloud on the company’s horizon: ever-tightening fuel-efficiency and emissions rules.

MY COMMENT: Really?? That’s it? Fuel-efficiency and emissions rules? That’s the best you can come up with?

C’mon, JLR’s downside risks are far greater than that. For example:

1. How will JLR compete with the Japanese (Acura, Infiniti, Lexus) on price or the Germans (BMW, Audi, Mercedes) on perceived quality? My view is that JLR’s models are too expensive to effectively compete with the Japanese manufacturers. They just don’t have the volume. And they are not as highly regarded as the German brands. They just don’t have the prestige, and as a result must settle for lower margins. In this sense then, JLR is stuck in the middle.
2. The auto industry continues to be saddled by mass overcapacity. Coupled with what I suggested in point #1, it’s not entirely clear to me how Jaguar and Land Rover can survive the inevitable industry shakeout.
3. What happens if/when the global economy slows again (especially in Europe and the US) and sales of durable goods decline? JLR is already teetering on the verge. Even a modest economic slowdown could spell the end to the brands.
4. JLR still carries a hefty debt burden that Tata Motors is working through. Even with a restructuring of that debt, a turnaround of JLR is a tall order, and $3 billion in debt is not chump change. It’s reasonable to ask whether Tata will ever earn enough (even if JLR remains profitable) to provide a reasonable return on investment.
5. As in my previous posts, I still wonder about Tata’s ability to derive synergies from JLR, to rationalize JLR’s operations, and right two long-uncompetitive brands.

But who knows. Tata Motors might just prove me wrong. After all, JLR is marginally profitable (for now). And Tata Motors certainly picked a qualified leader in Carl-Peter Forster to lead the group.

Only time will tell…

…at least not according to the US Treasury (see the Treasury’s Interim Report on Exchange Rate Policy).

According to the Treasury’s report:

China’s continued foreign reserve accumulation, the limited appreciation of China’s real effective exchange rate relative to rapid productivity growth in the traded goods sector, and the persistence of current account surpluses even during a period when China’s trading partners were in deep recession together suggest that the renminbi remains undervalued.

It was easy to overlook the recently released Treasury report in the wake of the G20 summit, where much of the debate centered on austerity versus stimulus rather than China’s mercantilist policies (see Agreeing to Disagree).

In this sense then, China’s strategy of publicly announcing a more flexible yuan policy in the days leading up to the G20 summit effectively deflected the debate away from the yuan. What’s more, China’s announcement was seemingly rewarded by a Treasury now more reticent to label it a currency manipulator. And the timing of the report’s release (after months of delay) seemed rather coincidental: It was released after the conclusion of the G20 meetings, and only after China seemed to mollify critics with its announced policy shift.

The interesting thing to me about the whole thing is that the yuan has barely budged since the announcement, rising less than 1% since late June. For a currency that some claim is undervalued by as much as 40%, that’s not likely to make much of a dent in persistent trade imbalances.

Now I’m as much a proponent of free trade as anyone (see Globalization Revisited and Globalization Discontents), but my view is that trade should be allowed to take place in an environment in which economies adjust as a consequence. Explicit policies that prevent such adjustment can be damaging to all parties.

With my bias now laid bare, it seems to me that China is simply paying lip service. It wants to appear accommodating, publicly declaring its intention to allow the yuan to strengthen against the dollar, while continuing to rely on exports to the US as its main growth engine.

Given the recent turmoil in Europe (China’s second largest trading partner), maintaining its exports to the US has taken an even heightened importance (see Revaluation Postponed and Revaluation and Euro Weakness). And in a world where everyone suddenly wants to play beggar-thy-neighbor (China, Japan, and now even Europe), the US is now everyone’s neighbor (for a brilliant treatment of the issues see Capital Tsunami).

This cannot continue indefinitely.

Against that backdrop, don’t be surprised if the trade deficit and cries of unfair trade practices begin to occupy a more prominent place in political discourse.

Another G20 summit meeting has come and gone. The heads of the eight leading industrialized nations, the G8, met first on Friday and Saturday, followed by the full G20 complement, representing the twenty most important global economies.

The primary agenda for this summit was the global financial system and the world economy. Throughout the meetings, pronouncements of shared financial goals and economic cooperation were so frequently and publicly communicated as to become cliche, …not entirely unexpected for these kinds of events.

Was meaningful progress made and consensus achieved? It’s too early to tell (see a brilliant version of the communique in the Wall Street Journal, annotated by Marc Chandler, Simon Johnson, and Arvind Subramanian).

The desire for coordinated action on the global financial system and agreement on fiscal policy is certainly admirable, but the fact remains that each nation faces a differing domestic situation, and uneven economic and political pressures at home. Considering their differences, the fact that any consensus could be reached, let alone communicated, must be considered an accomplishment.

However, the most interesting storyline of the meetings was the tension between U.S. and European approaches to fiscal policy: spending versus austerity.

The U.S. position has always been that “pulling back spending too quickly could choke off the economic recovery.” On this count, Obama’s entreaties were acknowledged, “We must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today. In short, we have to do everything in our power to avoid a repeat of the recent financial crisis.” Meanwhile, agreements on targets for getting economic deficits under control, credibly committing to reducing deficits in the medium-term, and pledging to cut them in half by 2013, appeased European austerity proponents.

Although the gathering did not produce a uniformly agreed-upon fiscal solution, the consensus achieved could be described as one of “broad commitment to sensible long-term austerity.” Basically, participants agreed to ease into austerity – with some advocating for a quicker pace than others, …and plenty of room for individual interpretation.

At the end of the day, growth is the primary challenge for struggling economies around the world. Renewed growth will lead to increased tax revenues and the cash flow necessary to curb deficits, and ultimately, pay down debt. Although aggressively reducing government spending and increasing taxes seem intellectually appealing as solutions to deficit problems, reducing unemployment will be a real challenge for those countries that adopt austerity measures too soon. At the end of the day, the mechanism through which painful near-term austerity measures will increase employment and foster growth remains unclear, and threatens to derail whatever fragile economic recovery is currently underway. So countries with no immediate market-mandated need to impose austerity ought tread carefully.

Regardless, the paths to which the U.S. and its European counterparts have committed will, in the end, provide ample opportunity to observe, and debate, the long term economic consequences of their divergent fiscal approaches.

———————————————————————————————————

Parts of this opinion piece were co-written with Tom Cleveland, market analyst at Forex Traders, and I thank Tom for his contributions.

I’ve just now been catching up on reading since returning from Iceland. In perusing the periodicals I most enjoy, I came across an interesting article about high tech in Taiwan (see Taiwan’s Tech Firms Conquer the World). The article, aside from providing an interesting read in its own right, holds some important lessons for the People’s Republic of China.

Taiwan is now the home of many of the world’s largest makers of computers and associated hardware. Its firms produce more than 50% of all chips, nearly 70% of computer displays and more than 90% of all portable computers.

This is, no doubt, quite an achievement.

Acer, for example, surpassed Dell last year to become the world’s second-biggest maker of personal computers. HTC, which started out making smart-phones for big Western brands, is now launching prominent products of its own.

Much of the credit for the growth of Taiwan’s information technology (IT) industry goes to the state, notably the Industrial Technology Research Institute (ITRI). Founded in 1973, ITRI did not just import technology and invest in R&D, but also trained engineers and spawned start-ups: thus Taiwan Semiconductor Manufacturing Company (TSMC), now the world’s biggest chip “foundry”, was born. ITRI also developed prototypes of computers and handed the blueprints to private firms.

Taiwan’s overall economic development over the past 50 years has been nothing short of spectacular. And there is no doubt in my mind that China is trying to emulate elements of Taiwan’s development strategy. However, a strategy centered almost exclusively around manufacturing (whether it be in high tech or other industrial goods) comes with some serious risks. As the article explains,

This strength, however, is also Taiwan’s weakness. Most firms are junior partners in the world’s IT supply chains, making things others have developed. They are good at incremental innovation, mostly related to manufacturing…many of them are stuck in a “commodity trap”, cautions Dieter Ernst of the East-West Centre, a think-tank in Honolulu. Profit margins, he says, are razor-thin and do not allow adequate investment in R&D and branding. The Taiwanese industry is particularly weak where the most valuable intellectual property is created these days: in software, services and systems.

Hmmm, a commodity trap!

That’s an appropriate moniker, and exactly the position that China (and many other developing economies) risks finding itself in as it continues its commitment to manufacturing and export-oriented growth. I have discussed these issues in various blog posts (see Emergence of Emerging Market Innovation, China Attracting High-Tech Research, China Alternative Energy, and Globalization Discontents). The key for countries like Taiwan and China is to transition from an economy that simply manufactures the goods that are designed and developed elsewhere to one in which innovation, creativity, and high value-added services take root. Unfortunately, for developing countries, those transitions take an inordinate amount of time.

Just returned from a visit to Iceland, …hence the radio silence. Was there for a few days of work, followed by a few days of pleasure.

What an amazing place. The country is absolutely stunning in its beauty. And the people are absolutely wonderful. I can’t wait to go back.

That said, it’s sad, really, that the majority of Icelanders don’t seem to understand the full gravity of the debt problems that they currently face (for background see here). If they decide to go along with the current debt repayment plan they will have to accept years of sub-par growth at a minimum, and potentially, live through a few years in which they teeter on the verge of default. Refusal to pay now, however, could quickly propel Iceland into economic crisis as foreign credit dries up and hard currency becomes scarce.

What a mess!

Personally, I think that in voting down the most recent Icesave Referendum, Iceland is trying to play hardball with the UK and the Netherlands, hoping it will lead to a more favorable negotiated settlement while convincing them to shoulder some of the burden for the outstanding debt.

I hope they (the Icelanders, Brits, and Dutch) can work it out.

If not, that would make my movie choice on the flight over somewhat ironic. I found it interesting that Iceland Air would even offer “Wall Street” for its passengers as an in-flight option; but ironic how, for Iceland, Bud Fox’s sales pitch touting “extraordinary opportunities emerging in the international debt markets” might desperately be put to use.

In a post several days ago (see Yuan Revaluation, Euro Weakness, and the US Recovery), I suggested that while I believe that the yuan ought to be revalued vis-a-vis the dollar, the crisis in Europe would likely put any such plans on hold. I wrote,

…although I agree that China needs to address the yuan-dollar peg, a gradual revaluation to competitive levels is probably the best outcome for the global economy. A sudden rise in the value of the yuan could come with painful near-term adjustments that derail the currently fragile global recovery.

But that said, there’s now an additional complicating factor: With the euro depreciating against both the dollar and the yuan, any plans that Chinese policymakers may have had to revalue the yuan against the dollar are likely to be put on hold…

Sure enough, there seems to be some chatter emanating from China that its policymakers are considering delaying a revaluation (see Yuan Revaluation Could Be Postponed, ht BA). According to the People’s Daily:

Worried about a depleting trade surplus and a possible slowdown of its economy later this year, China is not likely to accelerate pace to revalue its currency, the yuan, experts revealed.

The Beijing-based China Daily reported Wednesday that the chances of an early revaluation of the renminbi look unlikely and could happen much later than expected, considering that the nation’s trade surplus may see steep erosions due to the European debt crisis and the growing trade protectionist measures against China.

Interestingly, and quite compellingly, Michael Pettis argues that this is exactly the wrong response (see Don’t Misread the Euro Crisis). Instead, he argues that now is precisely the time for China to change its trade policy.

The Greek crisis, rather than reduce the urgency for China to revalue its currency and adjust its trade policy, may on the contrary require that China react much more aggressively than originally planned. Why? Because any sharp adjustment in trade or capital flows in one part of the world must automatically force a series of equally sharp adjustments elsewhere…

This need to balance implies that the problems in Europe are going to make international trade relations, and especially those between China and its largest trading partners, much tenser. In fact I worry that the sudden and unpredicted speed of the European adjustment will force a resolution of the global imbalances at a far faster pace than I, already pessimistic, was expecting.

…is there anything that China can do to head off conflict?  Yes.  It can buy euros, the more the better – just lift every offer out there. By strengthening the euro, or at least limiting its weakness, this strategy will force the brunt of the adjustment back onto European surplus countries rather than onto the US and, via the US, back onto China.  Sarkozy and other European leaders might not be very happy, of course, but they will be at least partially mollified by the net capital inflows and the reduced humiliation of a collapsing euro.

Interesting. Definitely some food for thought. And I encourage you to read his post in its entirety. But still, I can’t help but wonder whether the political will is there to follow through on such a strategy. My hunch is that policymakers will resist change until forced…

When it comes to the heavily-debated topic of yuan revaluation, I am in the camp that believes the yuan is undervalued overvalued and ought to be revalued. That said however, I have advocated caution with respect to how soon and how fast such an appreciation should take place. My main concern revolves not only around the impact of a yuan revaluation on the Chinese economy, but also its knock-on effects to the U.S. economy (see China and the Revaluation of the Yuan and Yuan Again).

In the former post I opined:

Think about the short-term shock to the Chinese economy, which depends upon exports for a good portion of its GDP. By many accounts, exports make up some 25% of Chinese GDP. A revaluation of the yuan makes Chinese exports relatively more expensive thereby decreasing foreign demand for Chinese-made goods. This negatively impacts local production and creates a feedback loop through to domestic employment and wages. In the extreme, this threatens social stability, and China is certainly not the poster-child for social stability.

Not only that, but given the foreign interests and investments in China, it is not entirely clear to me that a yuan revaluation that catapults China into recession would not result in a global contagion effect. Supply chains are so interconnected around the globe that an upward price movement for intermediate and finished goods coming out of China could have dire consequences for Western companies that rely on Chinese-sourced goods (just ask Wal*Mart).

In the latter post I added:

…the near term economic adjustments associated with a significant rise in the value of the yuan could be painful, not just for China, but for the rest of the world as well. In addition, a sudden rise of the Yuan could be socially destabilizing for China. Given China’s already tenuous political and social situation, it is therefore difficult from a policy standpoint for Chinese politicians to justify…

So basically, China has made a commitment to a production-based, export-oriented economy. Although it certainly is in the long-term interest of China to rely less on domestic investment and exports while encouraging domestic consumption, such an adjustment takes time and there are adjustment pains associated with such a shift. Similarly, any shift of the US economy from one that relies on consumption to one that is centered around production would likewise take time and require some painful adjustments.

I was therefore not surprised to see a recent article summarizing the stance of Justin Yifu Lin (chief economist of the World Bank) with regard to a yuan revaluation. He echoes the sentiment I expressed, and details the nature of some of those “painful” adjustments (see Revaluation Would Hurt U.S.).

The chief economist for the World Bank said on Saturday that if China were to revalue its currency it would actually hurt rather than help the U.S. economy.

He acknowledged that if China stopped selling renminbi and buying foreign currencies, the policy that critics say keeps the currency artificially undervalued, Chinese exports would become more expensive.

But he said because most of the products China exports to the United States are labor-intensive goods U.S. manufacturers stopped making years ago, the U.S. would only have two choices: buy the products from other countries or from the Chinese.

Either way, Lin said, the cost of those goods would rise for U.S. consumers and that would depress both consumer spending and job creation in the United States.

So again, although I agree that China needs to address the yuan-dollar peg, a gradual revaluation to competitive levels is probably the best outcome for the global economy. A sudden rise in the value of the yuan could come with painful near-term adjustments that derail the currently fragile global recovery.

But that said, there’s now an additional complicating factor: With the euro depreciating against both the dollar and the yuan, any plans that Chinese policymakers may have had to revalue the yuan against the dollar are likely to be put on hold (see Europe’s Debt Crisis Casts Shadow Over China).

The pain of the European debt crisis is spreading as the plummeting euro makes Chinese companies less competitive in Europe, their largest market, and complicates any move to break the Chinese currency’s peg to the dollar.

…in light of the euro’s nose dive, such a move could be difficult. Letting the renminbi rise against the dollar would also mean a further increase in the renminbi’s value against the euro, creating even more problems for Chinese exporters to Europe.

Some Chinese companies are already running into difficulty because of the euro’s fall against the renminbi.

“We have been receiving calls from some European clients who signed contracts with us earlier this month, and they all want to cancel their orders, since the depreciation of the euro has eroded all their margins and then some,” said Elvin Xu, the sales manager of Guangdong Ouyi Electrical Appliance in Zhongshan, China, which makes gas stoves, heaters and water heaters.

“They say they cannot increase the prices at their end to their customers, given intense competition in their marketplace,” Mr. Xu added.

In an example of just how interconnected the global economy has become, it is not just Chinese exporters that are adversely impacted by the weakness in the euro, but U.S. exporters as well.

Because American companies in particular compete in the Chinese market with European companies in many industries, the euro’s weakness against the renminbi is putting American companies at a disadvantage.

And the effects are not limited to China.

Euro weakness (dollar strength) lowers the overall profitability of American multinational corporations. It lowers profitability through the repatriation channel (each 1€ of profitability is now the equivalent of only $1.23 in profit). It also reduces the profitability of American exporters as U.S. exports become more expensive in European markets reducing demand for U.S. goods. And it makes it more difficult for American companies to compete with European companies not just in China, but in export markets worldwide as European products become relatively cheaper.

So the problems in Europe that some pundits believe are now largely contained can have serious consequences for global economic growth. And as the New York Times article rightly concludes:

…even China — the world’s fastest-growing major economy and increasingly the engine of global growth — is not immune to the crisis that started in Greece…

At this point it should come as no surprise to anyone that the European Union has committed to a large rescue package with a headline number of around $1 trillion (see EU Rescue Package for details).

With the caveat that I am not a macro-economic specialist (my specialty is in firm behavior), I share with you my initial thoughts on the bailout.

First, the good:

1. Wow! The EU countries were able to overcome their differences and react with a unified voice and purpose. They did so in a swift manner and committed an extraordinary sum of money to try to address a problem whose gravity they had, until this point, largely chosen to ignore, …or at least treat with benign neglect.
2. The capital committed, in my opinion, is large enough to help meet the short-term funding needs of the countries that might need to draw upon it (think Greece, Portugal, Spain). Greece had been largely shut out of external capital markets, and Portugal and Spain were following not too far behind. The weaker peripheral countries can now turn to the EU/ECB and IMF to raise funds that they might have trouble otherwise raising on their own.
3. The rescue package not only bails out the peripheral (PIIGS) European countries, but it also bails out the banks. For example, if you were a European bank sitting on a helping of Greek debt, imagine how your balance sheet looked on Friday given the market’s expectation for Greek default and how it looks today now that the ECB has announced that it will buy debt issued by the weaker European nations in the secondary market. Whether the banks deserve such a bailout is certainly open to debate, but the actions taken by the ECB will keep credit markets from freezing in the near term.

Now, the bad (or at least the part that gives me pause):

1. The obvious: Moral Hazard (see Go Hog Wild). How long will the richer European nations continue to allow their debt-addicted poorer brethren to behave badly?
2. Aside from the guarantees and the liquidity provisions, I am not seeing any meaningful change in the debt burdens facing Greece and the other PIIGS nations. There is no debt restructuring from what I can tell. Given that there is no debt relief for the PIIGS, it is likely that several of the PIIGS will be forced to tap the rescue packages.
3. My understanding from the rescue program is that if a country taps into the funds, it will be subject to mandated fiscal austerity programs. As we have seen in Greece, additional (and forced) fiscal austerity is likely to be poorly received, …so get ready for additional social unrest and political turmoil.
4. Assuming that the countries that agree to the mandated fiscal austerity programs are able to do so with minimal social unrest and political turmoil, the fiscal adjustments will come with negative shocks to the real economy. It will result in, at the least, lower economic growth in those countries that are forced to tap into the rescue funds, and at the worst, a severe recession that could have spillover effects even on the stronger European nations.
5. All this aid, and there’s still no guarantee that the weaker PIIGS nations will not ultimately default. So for all its benefits, all that the rescue package might achieve is to push the day of reckoning for many of these nations further into the future.

Taking stock therefore, the rescue seems to me like an attempt to buy some time for the struggling European economies while hoping that economic growth (or inflation) can emerge that will help those nations escape their debt problems.

Again, these are just my initial impressions. It will take some time for the dust to settle to see how the bailout plays out. For those of you looking for a deeper analysis from scholars whose specific interests and expertise lie in the analysis of macro-economic issues, I refer you to Simon Johnson, Paul Krugman, and Nouriel Roubini.

The Economist provided a very nice chart last week (see Still in a Spin) breaking down the foreign bank exposure to Greek sovereign debt (as compiled and reported by the BIS).

From the table, it seems that French, German, and Swiss banks have the greatest overall exposure to Greek government debt. But there is much more to it than that…

The figures presumably capture the nominal amount that foreign banks hold in Greek government debt expressed as a percentage of Greece’s total outstanding debt. However, to the extent that foreign banks have hedged their exposure through insurance purchased in the CDS market, the table will not reflect the true exposure of those banks.

We can’t quite know the extent of the exposure to Greek sovereign debt without knowing the exposure of banks (and non-bank financial institutions) to CDS positions on Greek sovereign debt. Since the CDS market is opaque and unregulated, my fear is that, aside from the obvious threat of contagion to the other PIIGS economies, the lack of transparency regarding exposure to Greek CDS contracts might result in a “credit crunch” redux. Might there be a sovereign equivalent to AIG or AMBAC out there?

With the global economy in the midst of a still fragile recovery, I certainly hope not…