/ 11 January 2011

Japan to buy euro debt, Portugal resists bailout

Japan pledged on Tuesday to buy eurozone bonds this month in a show of support for Europe’s struggle with a seething debt crisis as Portugal wrestled to fend off market and peer pressure to seek a bailout.

Portuguese Finance Minister Fernando Teixeira dos Santos said his country was doing everything it could to avoid a humiliating EU-IMF financial rescue, already granted to Greece and Ireland, and was still paying relatively low interest rates.

“We are seeking to avoid this possibility,” Finance Minister Fernando Teixeira dos Santos told TSF radio. “We are doing our work. Clearly, Europe is not doing its work to guarantee the stability of the euro.”

However, a Portuguese central bank board member, Teodora Cardoso, was quoted as saying Lisbon would do better to seek international financing, breaking ranks with political leaders.

“It would be easier if we had foreign help because this would mean that the adjustment would not be so abrupt, but if we do it alone, for the markets to believe in it, it has to be brutal,” Cardoso said according to news agency Lusa.

Yields on Portuguese 10-year bonds remained above 7% on Tuesday, a level widely regarded as unsustainable, despite European Central Bank intervention to buy them reported by traders on Monday.

Japanese Finance Minister Yoshihiko Noda said Tokyo was considering using its euro reserves to buy about 20% of the AAA-rated bonds to be jointly issued by the eurozone to raise funds to support Ireland.

“I think it’s appropriate for Japan to purchase a certain amount of bonds to boost confidence in the EFSF (European Financial Stability Facility) and make a contribution as a major country,” Noda said.

Japan’s offer comes days after China renewed its commitment to buy Spanish debt and analysts said it reflected both Tokyo’s concern about the impact of the crisis on its export-reliant economy and an effort to reassert itself on the global stage.

A senior adviser to China’s central bank said in a Reuters interview that Beijing too should be buying safe, jointly guaranteed eurozone debt rather than riskier bonds issued by troubled member states such as Spain and Portugal.

“In principle we support the euro, but we also need to ensure that our investment is safe and generates returns,” said Yu Yongding, an influential economist in the Chinese Academy of Social Sciences, a government think-tank.

“I think it’s much safer if we buy the fund as it has a triple-A rating,” he added.

Decisive action urged
Unofficial estimates described by a senior EU official as credible suggest China holds more than seven percent of the €8,8-billion in outstanding eurozone public debt, mostly through its State Administration of Foreign Exchange (SAFE) and sovereign wealth funds.

The European Union set up the €440-billion EFSF as a safety net for heavily indebted eurozone nations, but it failed to deter investors from betting on more bailouts.

Breaking ranks with a chorus of European officials who have insisted that further rescues were by no means inevitable, Finnish Finance Minister Jyrki Katainen said on Tuesday that Ireland may not be the last country to seek financial aid.

Speaking to a local broadcaster, Katainen also said Lisbon needed to act decisively to calm markets, though he declined to say whether there were any talks about loans to Portugal.

“Portugal has already announced many actions, but it would be good to review what more could be done,” he told MTV3.

Asked about a Reuters report that Germany, France, Finland and other eurozone countries were pushing Portugal to seek an assistance programme to prevent contagion spreading to much larger Spain, Katainen said: “I cannot comment on other countries’ actions … because rumours create new rumours.”

Japan’s announcement briefly lifted the euro as far as $1,2992 on trading platform EBS from around $1,2925 but it was back at Monday’s levels in early European trading.

“I don’t think these comments change the backdrop for the euro at all,” said Todd Elmer, currency strategist for Citi in Singapore.

“Despite the fact that we’re seeing this groundswell of international support, it doesn’t really change or address the underlying problem and that’s not going to change until the European authorities themselves come up with a more comprehensive solution.”

Analysts said that besides concern that an escalating debt rout in Europe could thwart Japan’s own recovery, Tokyo might also be acting to preserve its standing in global economic diplomacy after Beijing seized the initiative.

China’s declared support for Spain — the eurozone’s fourth-largest economy — follows Beijing’s pledges last year to buy bonds issued by Greece, the first eurozone nation to need a rescue.

Analysts also say that just like Beijing, at odds with Europe and the United States over its yuan policy, Tokyo could do with some goodwill capital after its market intervention to curb the yen drew fire from its trading partners. – Reuters