beyondbrics

Guido Mantega, Brazil’s finance minister, had some words of comfort on Tuesday for eurozone policy makers wondering how to get themselves out of their present mess.

“We’re going to meet next week in Washington and we’re going to talk about what to do to help the European Union get out of this situation,” he told reporters, referring to a meeting to be held on September 22 between the finance ministers and central bank governors of the Bric nations – Brazil, Russia, India China, plus South Africa.

His comments followed a story in Valor Econômico, Brazil’s leading business daily newspaper, about a proposed rescue plan. The story is rather more cautious than Mantega’s comments imply. But it does suggest the Brics may grab the occasion of the eurozone liquidity crisis to reassert their status on the shifting world stage.

Here is the Valor article, translated by beyondbrics:

The Bric countries – Brazil, Russia, India, China and South Africa – are trying to prepare joint action to offer help to the fragile global economy. Valor has learned that one of the ideas under examination is to increase the amount of their international reserves invested in euro-denominated bonds. The acquisition of more European sovereign debt would be limited to the bonds of more solid nations, such as Germany or even Great Britain. A decision should be taken at the meeting of finance ministers and central bank governors from the Brics on September 22 in Washington.

The political interest is clear – to appear publicly as contributors to market stability and thereby demonstrate to what extent the balance of the global economy is changing. In addition, the Brics would diversify [their reserves] and, in some cases, make better earnings than they do with US Treasury bonds. “Let’s wait to see how things develop in Europe,” one monetary authority told Valor cautiously. “At the moment” the person said, there is no firm movement on buying European bonds.

The countries are obliged to be prudent, as one Asian source said, as the subject could be controversial. As one person in Basle who will participate in the meeting pointed out, it would be hard to persuade public opinion of the merit of buying European bonds given the current calamitous situation of the eurozone.

Brazil has already diversified its reserves, reducing the share invested in US Treasuries. Brazil is already the fourth biggest creditor of the US, with $211bn in May.

In the financial crisis of 2008, the US Federal Reserve leant a lot of money to the Europeans. Now, another country seen as a potential “saviour” is China, the world’s second biggest economy, with $3,200bn of international reserves. But Beijing has already thrown dozens of billions of dollars into euro-denominated bonds and is more cautious in the current situation.

Yesterday, the race to safe havens took the yields on US, German and UK bonds to a historic low. Ten-year German ‘bunds’ were yielding 1.72 per cent a year. US Treasuries of the same maturity fell to 1.88 per cent. Meanwhile Greek bonds, reflecting the fear of default, were paying interest of more than 65 per cent.