To solve its debt problems, Italy is looking East
Italy’s selling a lot of debt tomorrow. The timing is not good: over the past days yields on Italian bonds have jumped. The markets remain unimpressed by the government wavering over structural and fiscal reforms; and more auctions like this one are looming, threatening to put more red ink on the government’s books and cause more sleepless nights for Berlusconi (if sleep is ever what he uses them for).
But hey, a big story conveniently came up today. A story that might change Berlusconi - and the Eurozone’s - destiny, as much as the face of the world. According to Italian officials (unnamed) the head of China Investment Corp, one of the world’s largest sovereign wealth fund, visited Rome last week, feeding hopes that China might buy a chunk of Italy’s public debt. Other contacts between Italian and Chinese officials took place this summer, and negotiations are set to continue. So many would like to believe that a surprise Chinese bailout is on order - one bigger than Europe can afford, and with less punitive conditions attached.
Yet analysts remain unconvinced. After the initial market jolt, they’ve clearly cooled to the idea: a €6.5bn sale of Italian debt fared pretty badly today, despite record high yields. They remember that Europeans have tried to court China before (Spain last spring, for instance) and it’s never really been successful. Most reckon that China will end up buying Italian debt, but on too small a scale to make a difference. And most also think that whatever happens, it won’t solve the underlying weakness of Southern European economies.
But Beijing’s reserves amount to $3200bn, and Italy’s debt to €1900bn. So it’s easy to see why even vague rumours can exite the markets. Whenever there is a problem in the West, China is always in people’s mind. Sometimes as part of the problem - but increasingly, as part of the solution.