EU deal papers over the cracks
When the world looked to China for help in bailing Europe out of debt that threatened another global recession, Premier Wen Jiabao said Beijing was willing to assist, but Europe must first put its house in order and act responsibly. After EU leaders finally clinched a deal to try to stem the crisis yesterday, French President Nicolas Sarkozy lost no time in announcing he would phone his Chinese counterpart Hu Jintao to take the question up with him.
Markets may have reacted positively, but without more detail it remains to be seen whether a complex plan forced through at the 17th European debt summit in two years, in time for debate at the G20 summit next week, makes the difference. It hinged on acceptance by major banks of an offer they couldn't refuse from Germany's Angela Merkel and Sarkozy - either accept a 50 per cent haircut on Greek government debt or face Greek insolvency, which could hurt them more. Markets will be watching how this 'voluntary' agreement by the Institute of International Finance, representing financial institutions, plays out. The challenge will be to ensure that all private bondholders fall into line. The deal could have long-term effects on risk management in credit markets.
Nonetheless, it is good to see bondholders share more of the burden with taxpayers of shoring up bank capital ravaged by deteriorating debt. The 50 per cent haircut represents a US$139 billion contribution to a second rescue for Greece. It forms part of a three-pronged strategy, along with forced capital raisings to bolster the continent's banks and the leveraging of the European Financial Stability Fund into a US$1.4 trillion bailout facility to help larger economies like Spain and Italy avoid being dragged further into the crisis. The question is whether the sums hastily assembled at the last minute are enough, given the incomparably greater cost of falling short.
For the time being at least Europe has papered over its political divisions in an attempt to end uncertainty and restore confidence. China has ample funds and compelling reasons to lend a helping hand. It cannot maintain economic growth in isolation from its great trading partners. But Beijing, understandably, has been concerned about fuelling both addiction to debt and aversion to the economic pain that must be endured to bring it under control. Moreover, China's leaders still see the mainland as a developing country with massive problems of its own to solve. How they balance these vital interests may be revealed at the G20 summit. It is a good sign that Beijing has welcomed the new European consensus and pledged to support the measures announced.