{"id":3909,"date":"2019-07-31T08:41:02","date_gmt":"2019-07-31T08:41:02","guid":{"rendered":"http:\/\/euromenaenergy.com\/?p=3909"},"modified":"2019-07-31T08:41:02","modified_gmt":"2019-07-31T08:41:02","slug":"can-euro-replace-dollar-as-worlds-dominant-currency","status":"publish","type":"post","link":"https:\/\/emimer.com\/?p=3909","title":{"rendered":"Can euro replace dollar as world\u2019s dominant currency?"},"content":{"rendered":"
\n

Reuters\/ London<\/p>\n<\/div>\n

Should European countries want the euro to replace the dollar as the world\u2019s dominant reserve currency, the Sino-US trade war may offer a window of opportunity.
\nThe souring of ties between the world\u2019s two largest economies will indicate the extent to which China can switch some of its giant reserve holdings to another hard currency and also point to the limitations the eurozone faces in providing a viable alternative.
\nIn the post-World War Two era, no asset has ever fully matched US government bonds for size, liquidity and credit quality.
\nIt is the closest any global security has come to being perceived as a cash-like, risk-free asset with over $16tn worth of paper in circulation.
\nYet, a year into a bitter tariff war, there are some signs of Beijing\u2019s discomfort at being both the United States\u2019 biggest trade adversary and one of its biggest creditors.
\nRecent data showed China sold more US Treasuries in March than it has in any month over the past 2-1\/2 years.
\nIf that proves to be more than a one-month quirk, speculation will rise about where it is diverting those reserves, and the eurozone \u2014 the world\u2019s biggest trading bloc \u2014 tops the list of likely spots.
\nOn size alone, eurozone government bonds appear to provide a credible landing pad: outstanding securities are almost two-thirds of the overall Treasury market.
\nThere are signs already of greater Chinese interest in Europe \u2014 bankers attribute record Asian demand for recent Spanish, French and Belgian debt sales to Beijing.
\nAnd China has stepped up buying debt from Europe\u2019s quasi-sovereign entities, bankers told Reuters, in particular the European Stability Mechanism (ESM) a eurozone-guaranteed AAA\/A1-rated bailout fund.
\nAsian investors snapped up 33% of the ESM\u2019s recent 2bn-euro 10-year bond, data from International Financing Review shows.
\nAsian takeup for ESM\u2019s euro issues last year was 4%-5%. But for Chinese reserve managers to shift hundreds of billions of dollars from Treasuries to Europe\u2019s single currency, the euro bloc needs to address key shortcomings.
\n\u201cI find it hard to square the circle how such a huge Treasury holding can be diversified away, given the landscape we are in,\u201d said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers.
\n\u201cIn the eurozone there is not a big risk-free market…Twenty years down the line it may be different.\u201d
\nFor Ahmed, the main issue is that credit risk in the bloc is not uniform.
\nThe 19 members each run their own fiscal policies, budget rules are too loosely policed to ensure adherence, and euro exit remains a theoretical possibility.
\nSo wealthier members such as Germany remain net savers that run balanced budgets or even surpluses, while others, mostly in southern Europe, are dogged by high debt.
\nThe resulting mix of credit and political risks make it harder to see the aggregate eurozone bond market as a true mirror of the US Treasury universe.
\nRoss Hutchison, a fund manager at Aberdeen Standard Investments, says it boils down to the fact the United States \u201chas a federal nature that the euro area hasn\u2019t got yet\u201d. Additionally, distortions stemming from years of bond buying stimulus by the European Central Bank mean available euro government bonds are far fewer than may appear.
\nWhile euro government debt outstanding is around $9.5tn, the ECB is estimated to hold roughly a quarter.
\nAnd the kind of \u201csafe\u201d securities that reserve managers seek are even scarcer \u2014 AAA-rated debt from Germany, the Netherlands and Luxembourg totals around $2.5tn, less if ECB holdings are discounted.
\nDebt from slightly lower-rated France, Belgium and Austria would add another $3tn.
\nItaly on the other hand has the bloc\u2019s biggest government bond market, worth $2.3tn.
\nBut its poor debt-to-GDP ratio, sluggish economy and populist policies make its bonds riskier and its credit rating is a notch or two above junk.
\nSo in times of stress, investors clamour for German bonds, while in Italy, yields spike, threatening to undermine local banks that hold these securities.
\nItalian 10-year yields are at 2.5%, versus Germany\u2019s minus 0.22%. Such risks have chipped away at the euro\u2019s fortunes as a reserve currency \u2014 International Monetary Fund data shows it comprises 20% of global central bank holdings, from 26% in 2009.
\nThe decline is linked to the 2011 Greek debt crisis that then ravaged Spain, Italy, Portugal and Ireland, highlighting risks of default by a member state and redenomination of euro debt into a new currency.
\nEuropean officials are keen to counter the dollar\u2019s hegemony, and at a conference last month they debated ways to win the euro a \u201cstronger international role\u201d. But they made no mention of the one measure that could resolve the issue at a stroke \u2014 joint debt issuance via common eurozone bonds.
\nSuch securities would pool the bloc\u2019s risks, and offer safer securities than those from most individual nations.
\nOlli Rehn, Bank of Finland governor and an ECB governing council member, said last week a safe asset would help enhance the euro\u2019s international role, offering hope the issue will be on the agenda of the new European Commission later this year.
\nA common bond \u201cwould be more significant than the creation of another TLTRO in boosting demand for euros globally and reserve managers would be part of that story,\u201d said David Owen, chief European economist at Jefferies.
\nHe was referring to the ECB\u2019s cheap multi-year loans.
\n\u201cMaybe there will be more focus on pushing forward this agenda and taking advantage of the US and China having this trade spat,\u201d Owen added.
\nOthers, however, note that wealthier states oppose any common bond programme, fearing they will end up footing the bill.
\nAlso, across Europe populist and anti-establishment movements are on the rise, with the agenda of slowing integration and returning power to national capitals.
\nSuch groups grabbed a greater share of the vote in EU parliamentary elections last month, albeit less than expected.
\n\u201cIf anything, the trend is towards decentralisation of power,\u201d Ahmed said.<\/p>\n","protected":false},"excerpt":{"rendered":"

Reuters\/ London Should European countries want the euro to replace the dollar as the world\u2019s dominant reserve currency, the Sino-US trade war may offer a window of opportunity. The souring of ties…<\/p>\n","protected":false},"author":1,"featured_media":3913,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[17],"tags":[46,48,57,68,76,77,82,86,87,90,96,99,103,107,109,111,113,137,139,146,148,160,174,183,184,201,202,209,222,230,232,233,244,246,249,256,262,263,267,277,279,280,285,288],"class_list":["post-3909","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance","tag-aramco","tag-athens","tag-baroudi","tag-carbon","tag-climate","tag-climate-change","tag-co2","tag-cyprus","tag-decarbonising","tag-democracy","tag-doha","tag-eastmed","tag-egypt","tag-embargo","tag-emissions","tag-energy","tag-energy-peace","tag-gas","tag-gazprom","tag-greece","tag-greenenergy","tag-international-maritime-disputes","tag-lebanon","tag-maritime-boundaries-east-mediterranean","tag-maritime-disputes","tag-offshore","tag-oil","tag-opec","tag-pollution","tag-poverty-alleviation","tag-putin","tag-qatar","tag-rosneft","tag-roudi","tag-russia","tag-saudi","tag-solar","tag-solar-power","tag-straddling-hydrocarbons-reserves","tag-total","tag-trump","tag-turkey","tag-unclos","tag-usa"],"_links":{"self":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/3909","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=3909"}],"version-history":[{"count":0,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/posts\/3909\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=\/wp\/v2\/media\/3913"}],"wp:attachment":[{"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=3909"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=3909"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/emimer.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=3909"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}