Emerging countries rushing valiantly to the rescue of a Europe drowning in debt and keeping global growth from hitting the rocks? This is the message emanating from China and Brazil, but one that analysts say runs financial risks and might only have a small impact. Brazil has announced that the BRICS group of countries, which it forms with Russia, India, China and South Africa, will meet in Washington on Thursday to discuss how to help the EU in its latest debt crisis.
China has said it stands ready to boost European investments.
The proposal for the BRICS to help “makes a lot of sense,” but would have a limited impact, according to Alex Agostini, chief economist at Brazilian risk analysis firm Austin Rating.
“Everyone has to be involved in looking for solutions because the economy is globalized and the crisis has negative effects in all countries,” Agostini said.
Help from the emerging economies, which have grown faster in recent years than the major industrialized nations, “could help to temporarily reduce this moment of volatility, but it won’t resolve the problem” of structural weaknesses in the eurozone, he said.
NK Singh, an Indian lawmaker, said the BRICS must help contain the crisis or risk a drop in exports caused by exchange rate volatility and increased “protectionism.”
Analysts believe the emerging powers can help by buying bonds of debt-ridden eurozone countries.
“All emerging countries have current account surpluses, not just China, which has the biggest foreign exchange reserves in the world with more than 3 trillion euros [US$2.2 trillion],” said Agnes Benassy-Quere, director of the French CEPII economic research center.
“To recycle these surpluses, rather than putting everything in gold or Swiss francs, it would not hurt them to buy Italian treasury bonds,” she said.
IMF managing director Christine Lagarde has said emerging economies coming to the aid of Europe was “an interesting development.”
“But if they limit themselves to buying bonds deemed safe by everyone, like the German and British [bonds], they wouldn’t be taking much risk. My hope is that if interventions like this take place that they’ll be large and not limited to certain states,” she told Italian daily La Stampa.
This would mean buying bonds which investors are fearful cannot be repaid in the long term.
The emerging countries might buy some, but are probably not ready to buy a lot of debt from eurozone countries currently feeling market pressure, said Bhanu Baweja, a specialist in emerging economies at the UBS financial services company.
The risk is too high, he said, and emerging countries are facing their own domestic challenges.
Italy has admitted its finance minister met the head of China’s largest sovereign wealth fund, CIC, last week, although officials said direct investments into companies rather than purchases of Italian government bonds was discussed. The G7 group of rich countries — Germany, Canada, the US, France, Italy, Japan and the UK — failed last week to find any answer to the global economic slowdown and has turned for input to the G20, which also includes emerging states.
South African Minister of Finance Pravin Gordhan told journalists on Wednesday that “within the G20 context we’re going to have these sorts of interactions which are useful.”
However, while emerging economies may be able to help, he said, “the crisis in the eurozone is one that ... the Europeans themselves need to resolve.”
Benassy-Quere said emerging economies, notably China, can help Europe by “rebalancing growth towards domestic demand,” which would allow rich countries to sell their products there.
If they do not do so now, the emerging markets might have no choice later, she added.
“If global growth slows down, emerging markets will no longer be able to rely only on their exports and will have to develop their domestic markets. They must accelerate this trend,” the economist said.
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