The head of Europe’s rescue fund sought to entice China yesterday to invest in the facility by saying investors may be protected against a fifth of initial losses and that bonds could eventually be sold in yuan if Beijing desires.
European Financial Stability Facility (EFSF) chief executive Klaus Regling was in China to persuade Beijing to stump up money and help the eurozone beat its two-year-old debt crisis. He said the EFSF may invest in a special purpose vehicle and absorb the first 20 percent of losses.
Regling did not say whether China had asked for that degree of protection and declined to comment on his meetings in Beijing. However, he said he expected to submit a proposal on how to scale up the 440 billion euro (US$622.4 billion) EFSF rescue fund soon.
Expanding the EFSF to 1 trillion euros is key to the eurozone’s latest anti-crisis plan, put together at a Eurozone summit this week. Details on how this would be done have yet to be finalized and European leaders are under pressure to show the plan would work.
“The EFSF will take a certain tranche that will be a junior tranche, which means if something goes wrong, the first loss will be carried by the EFSF. It could be around 20 percent,” Regling told students at Tsinghua University.
Regling said the fund could sell bonds in yuan in future, if Beijing so desired.
“We have so far only issued euro bonds, but we are authorized to use any currency we want if it seems efficient,” he said. “It also depends on the Chinese authorities, whether they would approve that. I think it is probably more difficult. But I could imagine that over the years it might happen.”
Regling was visiting cash-rich China two days after eurozone leaders struck the deal to boost the firepower of the EFSF, recapitalize banks and reduce Greece’s crippling debt burden.
French President Nicolas Sarkozy immediately got on the telephone to China after the summit to seek financial help, saying Beijing had “a major role to play.”
Europe has said the EFSF may be expanded either by offering insurance to buyers of eurozone debt in the primary market, or via a new special purpose investment vehicle that it hopes would draw funds from China and Brazil, among other countries.
The deal has left major economies Italy and Spain under pressure.
Regling made it clear he wanted to determine what it would take for Beijing to put more money in the EFSF, but he hinted it was also in China’s interests to have a healthy euro and an alternative to the US dollar as a reserve currency.
“Many particularly large economies in the world want to have ... the euro as part of the international monetary system. That is a good reason to support our program,” Regling said.
When asked why Beijing should buy more euros and risk currency losses if the bloc launches another round of quantitative easing, Regling said the European Central Bank (ECB) had been prudent in growing its balance sheet, compared to the US Federal Reserve and the Bank of England.
“I can assure you should invest in the euro, this is not the problem,” he said. “The ECB has only one objective — price stability — and they will deliver.”
Stuck with elevated inflation, China worries that ultra-loose monetary policies abroad will further stoke price pressures at home. It has repeatedly scolded the US for its quantitative easing, deeming it “irresponsible.”
Some analysts agree that China has far more upside than downside in providing support for Europe, not least in protecting its global trade. However, it may drive a hard bargain to part with some of its US$3.2 trillion foreign exchange reserves, the world’s largest.
Beijing is, nonetheless, cautious. Although China has expressed confidence that Europe can survive its crisis, it has made no public offer to buy more European government debt.
The careful stance was underscored on Friday by Chinese Vice Finance Minister Zhu Guangyao (朱光耀), who said Beijing was awaiting details on new investment options for the EFSF before deciding its next move.
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