Talk that Italy had approached China looking for a buyer for some of its $10 billion ($A13.1 billion) of bonds on offer helped stabilise global markets, but analysts warned the development is likely to give only a short-term reprieve to Europe's financial problems.
TALK that Italy had approached China looking for a buyer for some of its ?10 billion ($A13.1 billion) of bonds on offer helped stabilise global markets, but analysts warned the development is likely to give only a short-term reprieve to Europe's financial problems.
Troubled global markets were steadied by a report that China could make a landmark investment in Italy to help stabilise the debt-laden nation's finances. The report, by London's Financial Times, said the Italian government also offered stakes in strategic companies to China as part of a sweetener to the bond deal.
Italy joins Spain, Greece and Portugal as among distressed borrowers that have turned to China since the global financial crisis has threatened to engulf euro-region sovereign debtors. Stocks around the world rose on the potential Chinese investment in Italy even as previous commitments failed to have a lasting effect.
The mooted bond buy offered further evidence that China was going to ''take over the role the US used to have when it was the wealthiest country in the world'', said Clifford Bennett, chief economist at Empire Economics.
''China is a new centre of wealth in the world and it's showing great diplomatic finesse, I believe, in stepping in and playing its part as a responsible global citizen,'' Mr Bennett said.
Italian officials have held talks with Chinese counterparts about potential investments, an Italian government official later told Bloomberg. The purchase of Italian bonds by China wasn't the focus of the talks, the official said.
News of the possible investment lifted US markets sharply on Monday. The Dow Jones Index was down as much as 167 points, but jumped on the news to close up 69 points, or 0.6 per cent, higher. After a sharp sell-down on Monday, Australian shares rebounded slightly. The benchmark S&P/ASX200 Index closed 0.85 per cent higher to 4072.7.
Italy planned to auction as much as ?7 billion of bonds yesterday even as its long-term borrowing costs surged to fresh highs, driven in part by worries of contagion from Greece's slide towards default. The jump in yields suggest the market is worried about Italy's medium-term outlook.
A debt of ?1.9 trillion - more than Spain, Greece, Ireland and Portugal combined - leaves Italy vulnerable to any advance in borrowing costs as it refinances maturing debt. The sales, which include as much as ?3 billion of bonds due in 2018 and 2020, will help fund ?14.5 billion of debt scheduled for repayment tomorrow.
''Chinese interest in Italian bonds might give risk assets a short-term reprieve, but we doubt it will limit safe-haven flows for long, as it does nothing to solve the serious structural fiscal problems in Europe,'' said Alex Stanley, a fixed income associate analyst with Commonwealth Bank.
Chinese Premier Wen Jiabao said in June his nation could offer ''a helping hand'' to Europe by buying a limited volume of sovereign bonds. China pledged that month to buy Hungarian government bonds and extend a ?1 billion loan for financing of development projects there. Spain secured a Chinese pledge to invest in its savings banks.With BLOOMBERG
Frequently Asked Questions about this Article…
Did Italy ask China to buy Italian bonds to help its debt crisis?
According to reports, Italy approached China looking for a buyer for some of its roughly $10 billion of bonds and even offered stakes in strategic companies as a sweetener. The report helped steady markets, though officials said bond purchases were not the main focus of talks.
Why would Chinese investment in Italian bonds matter to everyday investors?
News that China might invest in Italian sovereign bonds can calm global markets and lift risk assets in the short term, which affects stock and bond prices investors hold. The article notes markets rose on the potential deal, but analysts warn such moves may only give a temporary reprieve.
How did global markets react to the news of possible Chinese investment in Italy?
Markets rallied on the news: the Dow Jones recovered to close about 69 points higher, and Australian shares (S&P/ASX200) closed 0.85% higher to 4,072.7. The report helped steady troubled markets that had been under pressure.
Is Chinese buying of Italian bonds a long-term fix for Europe’s sovereign debt problems?
Analysts in the article say it is unlikely to be a long-term solution. Commonwealth Bank’s Alex Stanley warned Chinese interest might give risk assets only a short-term reprieve and does nothing to solve Europe’s deeper structural fiscal problems.
What makes Italy vulnerable and in need of bond buyers right now?
Italy faces high refinancing needs and rising borrowing costs: it planned auctions of up to €7 billion while long-term yields surged. The country carries about €1.9 trillion of debt—more than Spain, Greece, Ireland and Portugal combined—so any rise in borrowing costs could worsen its position as it refinances maturing debt.
Did Italian officials confirm talks with China were focused on bond purchases?
An Italian government official told Bloomberg that officials had held talks with Chinese counterparts about potential investments, but the purchase of Italian bonds was not the focus of those discussions.
Could Chinese investment change global financial leadership or the role of other creditors?
Some commentators suggested China’s moves signal it is becoming a new centre of global wealth and influence. Clifford Bennett of Empire Economics said China might 'take over the role the US used to have' by stepping in with landmark investments, though this was commentary rather than a confirmed policy change.
Has China shown precedent for buying European sovereign bonds or investing in Europe?
Yes. The article notes Chinese Premier Wen Jiabao said China could offer a 'helping hand' by buying limited volumes of sovereign bonds. China had pledged to buy Hungarian government bonds, extend a €1 billion loan to Hungary, and Spain secured a Chinese pledge to invest in its savings banks.
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