European instability could bog down Mongolia

These days the entire world economy depends on those lazy and incompetent European PIGS (Portugal, Italy/Ireland, Greece and Spain)... I'm just kidding, they're not all lazy...but I don't think we can count on these European "siesta" countries to tighten their boot straps and get to work rebuilding competitive economies.  Fortunately for them, the hard working and disciplined Germans shackled themselves to the Eurozone in 1999, meaning the Germans will likely pick up the tab and keep the bad eggs afloat.

On the other size of Euroasia, Mongolia is feeling the aftershocks from Europe.  The crisis is making it more expensive for everyone to borrow money.  Mongolia is on the verge of issuing its first ever government-guaranteed bond through the newly created Development Bank of Mongolia.  Unfortunately, the European crisis has created a heightened level of anxiety when it comes to sovereign debt and and the risk of default.  Thus, the interest rate on the new bond will be very high until the European debt crisis is settled.  So now DBM is sitting on its hands waiting for Europe to sort out its sh**.

The bond is not the only problem.  Europe happens to be China's largest export market.  If Europe defaults and enters a severe economic recession then China's economy will certainly shrink as well.  China's economic growth is already showing signs of a slow down.  Home prices are dropping and auto sales are retracting.  Reports today suggest that the special administrative region of Hong Kong entered a recession in the third quarter.  China is Mongolia's biggest trading partner.  If China experiences an economic slow down then the high projected growth that Mongolia is expected to enjoy over the next decade will be jeopardized.

China might also take matters into its own hands.  With a large stake in Europe and enormous reserves of foreign currency, China might be tempted to join in on the European bailout.  And for some reason European leaders are excited by the prospect.  They apparently feel no shame in showing the world that Europe's decadent societies can no longer stand on their own two feet without assistance from global superpowers.  But lets not get ahead of ourselves...the bailout from China might not even come.  There is political pressure on the Chinese government to make good investments and the Communist Party would risk losing legitimacy if it is seen to be making a poor financial decision by investing in Europe.  China might go for a bailout if other bargaining chips are brought to the table.  For instance, if China was offered more influence in the IMF, something it has sought for a while now, then it might take the bait and assist Europe.  But the long term solution for the global economy still rests on Europe's lap.  In order to regain confidence, Europe must reign in government spending and reform its "siesta" economies so that they can become competitive again.  Then China and the rest of the world might see twenty-first century Europe as a sound investment.