With the Portuguese, Spanish and Italian governments tapping capital markets for billions in new funding over the next few days, some back-up for the beleaguered euro has arrived from an unexpected source – Asia.
The Chinese and Japanese authorities have both declared themselves willing to buy Spanish and other eurozone sovereign debt at a time when it is being shunned by private investors. With the continuing support from the European Central Bank, it suggests that the euro may be better underpinned than the markets have assumed, at least in the short term.
Nonetheless, reports yesterday suggested that European officials are discussing proposals to increase the €440bn (£365bn) European Financial Stability Fund, the joint EU/IMF bailout facility fund, in a sign that they are making contingency plans for a Portuguese and also a Spanish rescue, which would exhaust the current fund's resources. European finance ministers meet on Monday and Tuesday.
Meanwhile, King Albert of Belgium has made the unprecedented step of asking his caretaker government to introduce a tighter budget; political uncertainty there has also unsettled markets and added to the euro's woes.
The single currency bounced back a little from its recent multi-month lows yesterday when the Japanese Finance minister, Yoshihiko Noda, said it was appropriate for his nation to buy euro-area government bonds. The Japanese authorities have indicated a preparedness to buy a fifth of the bonds that will be issued by the European Financial Stability Fund to support the Irish bailout last year.
Mr Noda said: "It's appropriate for Japan to make a contribution as a leading nation to increase trust in the deal. We want to buy more than 20 per cent."
The Japanese move follows reports that the Chinese government will buy some €6bn of Spanish government bonds in a "concrete action" to "help Europe" out of its difficulties.
China may want to build political influence and assure stability in an important trading partner. Diversification from the dollar in China's $2,000bn-plus of reserves is another motive.
Spain faces a difficult bond auction this Thursday as it tries to raise €3bn; Portugal will attempt to persuade investors to take €1.25bn tomorrow. The key question is how much interest the countries will have to offer, with the cost of funding soaring in recent weeks.
Traders were also sceptical about how significant the Asian assistance would prove. Kenneth Broux, a senior market economist at Lloyds Corporate Markets, said: "The paper is going to be AAA, so of course it's going to be oversubscribed with the euro rallying. But the fact that Asian investors are going to buy these bonds isn't going to resolve the crisis in some of the countries. The euro remains a sell on rallies."Reuse content