European Sovereign Debt Crisis: Has China Boarded the Train?

Posted on October 28, 2011


As part of a plan to lower Greece’s debt burden, and to try and contain the two year European Union crisis, it has been reported that euro zone leaders have come to an agreement with private banks and insurers.  The agreement imposes upon those banks and insurers to accept a 50% loss on their holdings of Greek sovereign bonds.  EU leaders have also increased their rescue fund, the European Financial Stability Facility, from $600 billion to $1.4 trillion, in order to enhance confidence in their bailout program and to safeguard the European Union from further contagion.

To aid in the rebuilding of faith and assurance in the EU, French President Sarkozy has requested support and investment from China, which has been approached on several other occasions in the past. Chinese Premier Hu Jintao responded by indicating that China may assume a supportive role in shoring up the bailout package.  It is Hu’s hope that the measures being implemented will help to stabilize markets.

However, China will need time to carefully evaluate this plan.  According to Shen Jianguang, a Hong Kong-based economist for Mizuho Securities Asia Ltd. “What worries China is that there is so much disagreement among European policy makers. It doesn’t want to be seen spending money on a plan that even Europeans don’t want to support.”

In the meantime, the foreign exchange markets are just as volatile as the stock and bond markets, with the Japanese Yen remaining the favorite safe haven currency. The Yen has risen four times to record highs this year, against the U.S. Dollar.  International investors and speculators have increased their Yen assets by more than double the 2010 amount, due to the prolonged debt crisis in Europe.

For questions /information, contact Joel Borshof: joel@imexfx.com 

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