Asian aid
January 11, 2011
Moves by Japan and China to boost confidence in the eurozone reflect the growing concerns in Tokyo and Beijing about the impact of the European debt crisis on their export-reliant economies.
And they have good reason to be concerned.
An international bailout of Portugal, after last year's rescue of Greece and Ireland, looks almost inevitable. For weeks, the country has been wrestling to fend off rising pressure from capital markets and eurozone members to seek a bailout and limit contagion.
Government funding difficult to sustain
Now neighboring Spain – the eurozone's fourth largest economy – appears increasingly vulnerable as well.
Markets have already pushed the 10-year Portuguese yield, or borrowing rate, to a punishingly high 7.1 percent, compared with the 2.9 percent for safe-haven Germany.
Portuguese officials have described the seven-percent mark as a threshold of sorts, suggesting that government funding above that mark will be difficult to sustain.
"Given that markets seem to believe that [these] debt levels are unsustainable, Portugal should, without further ado, start talks with the European Union and the International Monetary Fund to regain credibility," said Tom Kirchmaier, a lecturer at the London School of Economics, in an e-mail sent to Deutsche Welle.
On Monday, the European Central Bank (ECB) threw Portugal a temporary lifeline by buying up its bonds, in addition to Greek and Irish bonds. The ECB has bought 74 billion euros ($95.3 billion in troubled eurozone sovereign bonds since it began intervening to stabilize the market last May.
On Tuesday, Finance Minister Yoshihiko Noda said Japan will buy bonds issued by the European Financial Stability (EFSF). The Asian economic powerhouse is considering using its euro reserves to buy about 20 percent of the bonds, which will be issued by the EFSF to raise funds to support Ireland.
Number one export destination
That pledge comes just days after China assured Spain of its plans to invest in the indebted eurozone member state's bonds.
China has already been using its financial clout to expand its influence around the world. And since Europe appears to be replacing the US as China's number one export destination, stabilizing the eurozone only seems to be in the best interests of the Chinese economy.
Also, by buying euro assets, China can take an important step toward its stated goal of diversifying its foreign currency holdings, assumed to be about two-thirds in US dollars. Unofficial estimates suggest the country already holds more than 8 percent of the eurozone's outstanding debt.
China's show of support for Spain could help boost confidence in the troubled eurozone member.
The Spanish government has less of a problem with sovereign debt than it does with its banks. It needs to reassure the markets that losses at its banks will be manageable, as many of them continue to suffer from the bursting of its real estate bubble.
If Spanish bank losses should spiral out of control, the government, which would eventually have to step in to save the banking sector, could face a debt load rising much higher than the 79.9 percent of gross domestic product, projected in 2011.
Although EU bank stress tests last July showed Spanish banks in relatively good health, the test lost credibility after Irish banks, which also scored well, subsequently needed billions of euros in aid.
Author: John Blau(Reuters, AFP)
Editor: Cyrus Farivar