China Sees European Debt Crisis Threat to Global Recovery

The European debt crisis is causing concern for the recovery of the entire globe. The crisis supports a weak US dollar and that the risks could spread even further.

March 25, 2011, 11:27 AM EDT

By Bloomberg News

(Updates with central bank comments in fourth, 10th paragraphs.)

March 25 (Bloomberg) -- Europe’s debt crisis is a threat to the global economic recovery and sovereign risks in some countries could still emerge, China’s central bank said today.

Concerns about European government debt and geopolitical risks may provide support to a “relatively weak” U.S. dollar this year, the People’s Bank of China said in an outlook on international financial markets posted on its website today.

The central bank’s report reflects concerns that European governments may struggle to quell the region’s debt crisis as they spar over an emergency aid system. Portugal’s sovereign ratings were cut today by Standard & Poor’s and Fitch Ratings, threatening to deepen the debt woes of a nation that may need a bailout of as much as 70 billion euros ($99 billion).

“Europe’s sovereign debt crisis will continue to be a threat to the world’s recovery,” the People’s Bank of China said in its 125-page report. “There are risks that the crisis could spread further.”

Europe’s problems won’t be resolved until a number of countries restructure their debt and clean up their banks’ balance sheets, Citigroup Inc. chief economist Willem Buiter said in a Bloomberg Television interview on March 17. Greece and Ireland will probably need debt restructuring although not Spain, he said.

China’s Premier Wen Jiabao and central bank officials have expressed their support for, and confidence in, Europe and the euro amid the crisis which has seen Greece and Ireland agree to bailouts from the European Union and International Monetary Fund totaling 195 billion euros.

Confidence in Europe

Wen said on March 21 he felt “optimistic about the U.S. economy, about the European economy and the whole world economy.”

China has had a policy of increasing purchases of European debt and is seeking to deepen ties with Portugal, Foreign Ministry spokeswoman Jiang Yu said in Beijing yesterday. Deputy central bank governor Yi Gang said in January that China has confidence in European financial markets and the euro.

China holds the world’s largest foreign-currency reserves of $2.85 trillion and is the biggest overseas holder of U.S. Treasuries.

“The U.S. dollar may be relatively weak in 2011 because of a slower U.S. economic recovery, low interest rates and the nation’s double deficit,” the central bank said today. Still, Europe’s sovereign debt crisis and the risk of spreading political instability may “help the dollar perform strongly periodically, amid an overall weak trend,” it said.

Overly Loose Policies

The central bank reiterated the Chinese government’s concern that “continued and strengthened” quantitative easing in some countries could have a “relatively large” impact on developing nations whose economies have already recovered from the financial crisis.

Governments should avoid implementing policies that have a negative impact on other countries and should pay attention to risks that may arise from overly loose monetary policies, the report said. It also urged governments to avoid competitive depreciations of their currencies.

The PBOC, which is battling to contain inflation that’s exceeded government targets for the past eight months, said rising crude oil, grain and other commodity prices pose risks to the world economy.

Inflation risks and political conflict will support demand for gold this year and prices are likely to remain high even as the risk of a decline shouldn’t be ignored, today’s report said.

--Huang Zhe, John Liu, Kevin Hamlin and Regina Tan in Beijing, Sophie Leung in Hong Kong. Editors: Nerys Avery, Ken McCallum

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