20th September 2011
The warning comes on the eve of a meeting European leaders and representatives of the BRIC economies – Brazil, Russia, India and China in Washington and follows rumours last week that China had considered buying Italian bonds, and a report here on Fin24 that Brazil might contribute to bailout funds.
The Brazilian offer does appear to have some basis in truth. The website reports that "by floating the proposal first in the news media, Brazilian officials have ensured themselves maximum exposure despite growing evidence that the idea may not get support from their BRICs partners."
However it notes that the money is largely symbolic and insignificant compared to Europe's financing needs. Brazil is not making its $352bn in foreign reserves available for European bond purchases but is relying on a sovereign wealth fund that as of August totalled only about $9bn.
Hence Zoellick's call for realism.
"I have been cautioning people not to look for the panacea. A co-operative international response to Europe's crisis is useful and it helps that the International Monetary Fund and World Bank can draw on capital from cash-rich countries. But the idea that you are going to have the Chinese come with a bag of gold and bail everybody out of this problem, I wouldn't hold my breath," he said.
In addition the emerging markets might need the money. Indeed since their ‘emergence' these markets have periodically faced the risk of being undermined themselves by big capital outflows and a general global downturn could see that happen.
Ft.com reports that the stress tests conducted by the IMF suggest that Asian equity markets could see capital out flows reach $21.8bn due to uncertainly in the growth outlook. If this was combined with a drop in growth expectations and a rise in global risk, the outflows could reach $38.3bn.
It could also see $13.7bn flow from Latin American equity markets and $8.2bn from emerging Europe, Middle East and Africa. The report says that emerging bond markets could also be affected.
But international regulators have issued other warnings in recent days. The Economic Times notes that "The Bank of International Settlements (BIS) said the flow of international credit, fuelled by major central banks' bond purchase operations, could limit emerging market monetary authorities' ability to slow credit growth in their economies.
The BIS is worried that dollar denominated credit to private investors spurred by low interest rates particularly in the US is at very high levels in some Asian countries.
The report highlighted strong foreign currency credit growth in China, Hong Kong, South Korea, Thailand and the Philippines.
Though every crisis is different, these two issues, capital flight by foreign investors, and too much lending in dollars particularly for property, were at the heart of several emerging market crises in the last few decades though of course it is always a different train of events.
However back to more cynicism about that bailout.
Seeking Alpha's Carlos Alexandre has an interesting take among other things noting that Brazil made an offer to Portugal months ago but no help has actually materialised.
But more broadly, the website is sceptical about how much help the BRICs can offer when their relative economic power is assessed.
"The assumption that BRICs, or any nation for that matter, carry any weight on the global stage to convince astute private investors to put their money in a pit is a far-fetched theory. I know that China is viewed as the runaway train that will conquer the world, but once again some perspective is in order. Putting misleading and absolute numbers aside, and from a relative population and GDP measurement, Brazil's economy is twice as strong as China's, yet the Brazilian economy is only half as strong as Portugal's, and everyone knows by now that Portugal is at the bottom of the European totem pole. In addition, while Portugal's debt to GDP is 93 per cent, Brazil's is far from perfect at 66 per cent. China's official number is 17 per cent, but it has been challenged by many — outside and inside China — and the true number is thought to be closer to 100 per cent."
Alexandre's final point is that while between them the BRICs could probably afford to help out Greece in combination, they certainly couldn't help fund Europe out of its wider malaise.
In other words, no one in Europe should expect the cavalry to arrive any time soon.
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