BEIJING (Reuters) – The head of Europe’s 440 billion euro bailout fund played down hopes of a quick deal with China to throw its support behind efforts to resolve the bloc’s debt crisis but said he expects Beijing to continue to buy bonds issued by the fund.
Klaus Regling, chief executive of the European Financial Stability Facility (EFSF), was in Beijing for talks with Chinese officials a day after euro zone leaders struck a last-minute accord on the two-year-old debt crisis.
European leaders are now under pressure to finalize the details of their plan to slash Greece’s debt burden and strengthen their rescue fund.
After their summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to cut Athens’ debt load to sustainable levels.
Regling said the bailout deal with Greece was an exceptional case that he did not believe would have to be repeated for other nations.
Many in financial markets are concerned that the fund is not big enough to cope if major economies Italy and Spain are drawn deeper into the crisis. Italy’s borrowing costs hit new euro-era highs at a bond auction Friday.
“We all know China has a particular need to invest surpluses,” Regling told a Beijing news conference Friday, referring to the country’s $3.2 trillion of foreign exchange reserves, the world’s biggest.
France said investment by China would inspire confidence.
“The reality is that China is the third largest shareholder in the International Monetary Fund, and if China via the IMF wants to participate – not by saving Greece or the euro – but by participating in investment, that is a gesture of confidence,” French Finance Minister Francois Baroin said.
“What is happening in Europe and creating instability is that public and private investors are pulling out,” he told RMC radio.
Economists polled by Reuters Thursday were split down the middle over whether the writedown was big enough, with 24 of 47 saying it wasn’t and the remainder saying it was.
Reached after more than eight hours of hard-nosed negotiations between bankers, heads of state and the IMF, the deal also foresees a recapitalization of hard-hit European banks and a leveraging of the EFSF, to give it firepower of 1.0 trillion euros ($1.4 trillion).
Global stocks were expected to record their best week in over two years Friday, bolstered by the Brussels deal, while the euro held just below a seven-week high. Shrugging off the lack of detail in Thursday’s anti-crisis measures in Europe, shares extended the previous session’s sharp rally.
The FTSEurofirst 300 index of leading European shares was up 0.2 percent at 1,021.67 points in early trade.
Switzerland said it was looking at participating in the EU bailout fund via a special investment vehicle, although the idea could run into domestic opposition given the country’s euroskeptical nature.
Norway, however, whose $564 billion oil fund is Europe’s biggest investor in equities, said it had less than 100 million euros in EFSF investments.
Key aspects of the eurozone deal deal, including the mechanics of boosting the EFSF and providing Greek debt relief, could take weeks or even months to pin down, raising the risk of the plan unraveling as the last one did.
Three months ago, euro zone leaders unveiled another agreement that was meant to draw a line under the debt woes that threaten to tear apart the 12-year old currency bloc.
In a matter of weeks they realized it was inadequate given the depth of Greece’s economic problems and the vulnerability of European banks.
The new deal aims to address these holes.
Under it, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece’s debt burden by 100 billion euros, cutting its debts to 120 percent of gross domestic product by 2020, from 160 percent now.
The euro zone will offer 30 billion euros in “credit enhancements” or sweeteners to the private sector to get them on board. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid program in place before 2012.
The value of that package, EU sources said, would be 130 billion euros — up from 109 billion euros in the July deal.
“The debt is absolutely sustainable now,” Greek Prime Minister George Papandreou said.
In a bid to convince markets that they can prevent larger countries like Italy and Spain from being swept up by the crisis, euro zone leaders also agreed to scale up the EFSF, the 440 billion euro bailout fund they created in May 2010 and have already used to provide aid to Ireland, Portugal and Greece.
Around 250 billion euros remaining in the fund will be leveraged 4-5 times, producing a headline figure of around 1.0 trillion euros.
The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of euro zone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks and which is aimed at attracting investment from China and Brazil.
The methods could be combined, giving the EFSF greater flexibility, the euro zone leaders said.
But EU finance ministers are not expected to agree on the nitty-gritty elements of how the scaled up EFSF will work until some time in November, with the exact date not fixed.
Another question mark is Italian Prime Minister Silvio Berlusconi’s commitment to implementing reforms seen as crucial for restoring confidence in the bloc’s third largest economy.
Dogged by scandals, Berlusconi has promised to raise the retirement age to 67 by 2026 and attempt other reforms, but the EU is reserving judgment after repeated backsliding from Rome in recent months.
SARKOZY TALKS TO HU
French President Nicolas Sarkozy said he had spoken to Chinese President Hu Jintao by telephone Thursday and that Hu was relieved Europe had announced a deal to tackle a debt crisis that otherwise could have taken down the entire world economy and not just the economy of the euro zone.
He also defended the idea of Chinese investment in Europe’s anti-contagion fund, donning the hat of euro salesman.
“China has a major role to play. China must deploy more resources to stimulate the world economy: If they decide to invest in the euro rather than the dollar, why reject that? ”
“Why not accept that the Chinese place their trust in the euro zone?”
“China hopes all these measures will help stabilize the European financial market and conquer the current difficulties and promote the economic recovery and development,” Hu said, according to China’s state television.
($1 = 0.724 Euros)
(Writing by Giles Elgood; Editing by Ruth Pitchford)
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