China’s Stern Words on European Debt Crisis; Fights Own Woes

ECB again dismisses private investor involvement in bailout as China says crisis could spread

Through its central bank's annual financial stability report, China warned the world again on Tuesday that the debt crisis in Europe was threatening to spread because it had not been properly dealt with.

The warning came as the European Central Bank (ECB) once again dismissed calls for private bondholders to share in losses incurred by Greece as eurozone finance ministers prepared for their Tuesday meeting to consider the matter. Meanwhile, China was taking further steps to cool its own superheated inflation rate, raising required reserve ratios (RRR) at its banks yet again.

According to Reuters, the Chinese report sternly warned that the measures so far undertaken by the euro zone had failed to address the actual cause of the debt crisis, although they had temporarily stabilized things. "The sovereign debt crisis could continue to weigh on Europe's economic recovery," it said. "There is a possibility that the sovereign debt crisis will spread and deteriorate."

China, however, faces its own issue: that of runaway inflation. Its May inflation rate was the highest in 34 months at 5.5%, prompting Beijing to raise the RRR for the ninth time since October. When it takes effect on June 20 it will stand at a record high of 21.5%. Analysts had been expecting the central bank to raise interest rates; this latest RRR move may now forestall that, according to a Beijing analyst. Du Zhengzheng, an analyst at Bohai Securities in Beijing, said in the report, "I think the RRR rise this time aims mainly at curbing inflation ... The move is likely to delay the next interest rate rise to the end of this month or the beginning of next month."

Finance ministers for the euro zone were to meet later Tuesday to discuss the debt crisis, although there were no expectations that anything would be settled. An unidentified source was quoted saying, "There are no decisions expected today, it is just about looking for common ground."

The ECB is firmly opposed to any ostensibly voluntary participation by bondholders in Greece's bailout even as Germany continues to insist that such a measure is necessary. ECB Governing Council Member Christian Noyer was quoted saying, "If there is an operation it must be purely and solely voluntary. It must not lead to a default, even a partial one. The idea of involving the private sector in the management of crises has had a destabilizing effect," he added. "Indeed, the uncertainty it created has deterred private creditors from continuing to finance countries in temporary difficulty."

The ECB is worried that compelling bondholders to share in losses could cause the debt crisis to escalate and spread throughout the euro zone.

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