Economist Online

Interview of Jin Liqun, Chairman of China’s Investment Corp. (or CIC), China’s sovereign wealth fund, with $460 billion assets under management.

Jin offers his views toward Europe and her economic and political systems. He also explains why CIC is unlikely to inject large rescue investments as per European leaders’ request. I’d say Jin’s views toward Europe is quite typical in China.

Starting from 12″10′ in the video interview, Jin had some really strong (yet painfully true) comments toward European welfare system.

Similar to the soft budget constraints (or SBC) under former socialist countries, the budget rule under EU treaty is also “soft” in a sense that violating the rule won’t be really punished. Punishments, such as kicking the “rogue” member country out of the union, run contradictory to the political ambition of the European Union and would risk breaking the union altogether.

The other option is to rein in the government spending of the member countries. But that would require a centralized authority with direct control of the member countries, especially on their fiscal policies, i.e., how governments spend their money.  At current stage, Europe is not ready for such radical change, which requires a big surrender of their own sovereignty.  So what Europe will likely end up is a fake fiscal union with soft budget rules.  The moral hazard problem is unsolved.  Rest assured to see more budget rule violations in the future.

The following map from WSJ gives a very nice summary of how the union’s budget rule had been violated in the past.

Link to the article.

Now it looks like no matter what Europeans are trying to do, and how many summits politicians rush to put together, things just keep getting worse.

If PIGS (Portugal, Italy, Greece and Spain) were to ‘fly ‘, and debt contagion were to spread, and Europe’s Lehman moment finally to arrive, you probably want to at least have a slightest hint of where the next domino is likely to fall. That’s the purpose of this short post.

The following four charts are from researchers at BIS, including my former Brandeis teacher Steve Cecchetti.  I suggest that everybody take a minimum of five minutes going through these tables. For nerds like me, I stick them on the wall in my office.

All debt:

Government debt:

Household debt:

Corporate debt:

Chris Wood shares his insights on what’s likely the endgame of European sovereign debt crisis.

He predicts it will be either a move from monetary union to fiscal union, or a complete breakdown of the Euro. He thinks the first scenario is more likely and Germany will eventually budge.

Then, Jim Rogers comes in with his thoughts:

According to WSJ, less than two weeks after European leaders unveiled an agreement that was designed to bolster confidence in the region, the yield on Italy’s 10-year debt drew close to the 7% mark, a line in the sand of both practical and psychological importance to the market.

Psychologically, 7% has become a beacon due to the fact that Greece, Portugal and Ireland each sought bailouts soon after their debt reached these levels. While analysts said it is too simplistic to say that Italy will be forced to ask for support if its 10-year debt yields 7%, they said the recent selloff is taking the country to the tipping point.

A sharp slide in bond prices pushed yields to their highest levels since the inception of the euro. The two-year yield rose a staggering 0.60 percentage points to 6.04% while the five-year yield climbed 0.37 percentage points to 6.56%.The 10-year yield was up 0.27 percentage points to 6.60%, having hit a new high of 6.62% earlier Monday.

Update 1 (on Nov. 10, 2011)

Italian gov. bond yields continues to soar, now above 7% threshold. See the chart from WSJ below:

It seemed that Europe is gradually approaching its own Lehman moment.  What’s different, compared to previously trouble of other smaller PIIGS, is that the latest escalation fed fears that the euro-zone debt crisis is starting down its most perilous path: going from a storm raging among small countries at Europe’s fringe to one that strikes a major economic power.

Also, Italy’s debt load of €1.9 trillion ($2.6 trillion) is the second largest in Europe, behind Germany’s, and the fourth largest in the world. Next year, more than €300 billion of debt comes due, and Italy must continually tap markets to refinance it.