Can Brics build support for the eurozone?

The Brics emerging economies are considering offering support to the euro area, possibly by buying bonds, although doubts emerged that a significant plan would materialise.

A central bank adviser in China urged Beijing on Wednesday not to buy large amounts of euro area bonds and South Africa’s finance minister suggested his country might not have the financial firepower to support a bond-buying plan.

Greece, the most perilously placed eurozone country, also expressed scepticism.

“We have invited all the countries that you have mentioned [Russia and China] to take an active part in covering the country’s borrowing needs through the T-bill sales programme,” Greece Deputy Finance Minister Filippos Sachinidis told radio station Real FM. “Despite the invitation, we have found there was little or no participation at all.”

Despite its shut-out from bond markets, Athens still holds monthly T-bill auctions to cover short-term borrowing needs.

The Brics — Brazil, Russia, India, China and South Africa — will discuss what they can do next Thursday on the sidelines of meetings of the World Bank and International Monetary Fund in Washington, said R Gopalan, Economic Affairs Secretary to India’s Finance Ministry.

Speculation is mounting that Greece could default on its debts, and even exit the 17-nation eurozone.

Too big a crisis
In preliminary talks, the Brics discussed increasing their holdings of euro-denominated bonds to help ease the debt crisis, a senior Brazilian government official said on Tuesday.

However, analysts suggested bond buying would not work.

“The magnitude of the European crisis is so large,” said Abheek Barua, chief economist at HDFC Bank in New Delhi. “Unless there’s sort of massive buying, then it won’t make a difference.”

Even five weeks of bond buying by the European Central Bank, to the tune of €70-billion, have not turned investor sentiment over the debt crisis, which is now threatening Italy.

Chinese Premier Wen Jiabao said the world’s second-biggest economy was willing to help its main trade partner, but the euro area in turn needed to prevent the debt crisis from spreading.

With about $3.2-trillion in foreign exchange reserves, a quarter of which analysts estimate is in euro-denominated assets, China has the firepower to make a difference.

“The governments of all countries must truly shoulder their responsibilities and deal properly with their own affairs,” Wen said in a speech at the World Economic Forum in Dalian, China, although he made no direct mention of a Brics plan.

Central bank adviser Li Dakui suggested China should focus on its own economy. “We have more than our share of trouble to deal with,” Li said, referring to concerns in China about inflation and asset bubbles.

Lukewarm
South Africa’s Finance Minister Pravin Gordhan said his country lacked significant reserves, so it was undecided about buying euro area bonds. Net gold and currency reserves were just under $50-billion in August.

“South Africa is not part of that market at the moment and it’s the big countries who have $3.2-trillion in reserves. We are Mickey Mouse compared to that and they can afford to look at some of those issues,” he said.

New Delhi would be “cautious” about supporting a plan, an India’s finance ministry official, who declined to be identified, said on Tuesday.

India holds about 20% of its $320-billion in foreign currency assets in euro debt and a senior Indian official said that proportion would not change.

“All I can tell you is we will maintain the 20% ratio,” the official said.

Vadim Lukov, the Kremlin’s special envoy to the G8 and a Brics coordinator, declined to be drawn on a Brics plan.

“I will not deny or confirm this information,” Lukov said. “Any such information may disturb the markets and potential buyers of the bonds.”

‘Wide scope’ interventions
Global policy coordination would also be difficult because countries are at different stages of the economic cycle, India’s Finance Minister Pranab Mukherjee said.

A Brazilian government source said the country did not intend to use its international reserves of around $355-billion to buy European debt.

But it could use its sovereign debt fund, which is allowed to take on more risky investments, although that amounts to just $9-billion and is already mostly invested in stocks.

Brazilian financial newspaper Valor reported on Tuesday that bond purchases could be limited to debt from the more financially solid European nations.

International Monetary Fund head Christine Lagarde said she hoped that would not be the case.

“My hope is that if they happen, these interventions will be of wide scope and not limited to the safe bonds of a few states,” she was quoted as saying on Wednesday by Italy’s La Stampa newspaper. — Reuters

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