US Downplays European Crisis But China Very Worried

Tuesday, 25 May 2010 03:11 PM

 

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The United States suggested Europe's debt crisis would have minimal impact on global growth, but China took a more pessimistic view, warning it would impact demand for its exports and other regions would suffer too.

The two countries, meeting in Beijing for high-level talks, set the differing tones as euro zone leaders sought to conquer doubts that they can cut fiscal deficits and stimulate growth to overcome the crisis.

Global markets have been gripped by fears that a debt crisis engulfing Greece will spread to other highly indebted nations, particularly in southern Europe, dragging down the continent's economy and hitting trade with the United States and Asia.

"The euro zone problems haven't been cleaned up yet," said Nagayuki Yamagishi, a strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.

"And even though the global economy is definitely showing more signs of recovery than it did 6 months ago, worry continues that the euro zone's woes will put a brake on this growth."

Greece's prime minister on Sunday ruled out defaulting on payments or restructuring its debt and his Spanish counterpart vowed to push through an austerity plan despite union threats to strike.

In Beijing, where officials from the world's No.1 and No.3 economies were meeting for U.S.-China Strategic and Economic Dialogue, there were contrasting messages about the dangers Europe's woes posed to the global recovery.

U.S. Treasury Secretary Timothy Geithner, who next flies to Europe for talks in Britain and Germany on stabilizing the continent's economy and financial markets, said on Monday the global economy had been strengthening faster than expected.

At the weekend, a senior U.S. Treasury official, who declined to be identified, had said the European crisis would have minimal impact on the world economy.

China's state planning commission seemed less optimistic, saying on Monday that the crisis would affect demand of Chinese goods.

On Sunday, Finance Minister Xie Xuren had warned that Europe's debt woes could hit other regions.

"At present, risks from European sovereign debt have increased factors of instability in the course of global economic recovery," Xie wrote an essay published in the Washington Post and on his Ministry's website.

Some analysts suggest China may delay letting its yuan currency rise in value — as Washington has urged — out of concern that its exports to Europe will suffer.

"China is unlikely to de-peg the yuan anytime soon," Standard Chartered Bank said in a note to clients.

Citing, among other factors, the need to see some stabilization in global markets and a sustained trade surplus, the bank said Beijing is likely to wait until the third quarter to unleash the yuan. It had previously predicted May.

Japan's government also raised concerns, saying in its monthly economic report that attention should be paid to the potential risks of a slowdown in overseas economies, particularly in Europe.

European leaders have sought to deal with a crisis that has pushed many euro zone member states' borrowing costs sky high through a 110 billion euro ($135.49 billion) bailout of Greece and the setting up of a $1 trillion safety net to stabilize the single currency.

But after riots on the streets of Athens and with strikes looming elsewhere, investors remain concerned about whether Europe has the political will to rein in bulging government deficits and tackle sluggish growth.

"Europe is trying to solve a debt problem with further debt," said Domenico Lombardi, president of the Oxford Institute for Economic Policy.

Greek Prime Minister George Papandreou said in an interview published on Sunday in a Spanish newspaper that EU governments had been slow to act in order to prevent the Greek crisis spreading to other members of the 16-country euro zone.

"The EU took time to realize that speculators' attacks on Greece were just a step before attacking other countries and even threatening the stability of the euro zone," he said.

But he insisted Greece was not sliding towards insolvency.

"We have no need for defaulting on payments or restructuring," Papandreou told El Pais. "We have opted not to do so. We have opted to pay back the loans we have requested."

Spain's Prime Minister Jose Luis Rodiguez Zapatero is also under pressure to make spending cuts and implement long-awaited labor reforms to avoid a Greek-style loss of confidence.

The country's largest union has said it may call a general strike, but Zapatero insisted on Sunday he would not revise a 15 billion euro austerity plan.

"I know there are protests by those who do not share them (government views), like the unions, but we will not change," Zapatero told his Socialist party in Elche, southeast Spain. "No one can doubt at any time that Spain is a strong country and an economic power that will meet its obligations and pay debts."

The euro was under pressure again on Monday, after posting its first weekly gain against the dollar in six weeks last week as investors bought back the currency following its long slide.

The euro fell close to 20 percent against the dollar between a high in November and last week's 4-year low of $1.2143. Since then it has rebounded almost 3 percent to $1.2504 on Monday.

Adding to worries about government debt were concerns about the health of Spain's banking system, after the central bank said on Saturday it had taken over the running of savings bank CajaSur after a planned merger with another small lender failed.

The country's largely unlisted savings banks — accounting for about half of the financial system — are most exposed to struggling property developers and have seen their capital eroded by soaring bad loans.

© 2014 Thomson/Reuters. All rights reserved.

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