China in talks over buying Italian debt
• Italian finance minister meets China's sovereign wealth fund
• Traders hope Beijing will help tackle eurozone crisis
• Obama voices fears over Italy and Spain
• News of talks spark Asian rally but FTSE falls
• Traders hope Beijing will help tackle eurozone crisis
• Obama voices fears over Italy and Spain
• News of talks spark Asian rally but FTSE falls
Italian finance
minister Giulio Tremonti met the head of China Investment Corp in Rome
last week. Photograph: Riccardo De Luca/AP
China could step in to help rescue Europe from its debt crisis after holding top-level talks with Italy's finance minister.
The Italian government confirmed on Tuesday that Giulio Tremonti had met the head of China Investment Corp, the country's sovereign wealth fund, in Rome last week. It is understood that Tremonti asked the Chinese delegation to consider buying Italy's sovereign debt and making strategic investments in Italian companies.
The Italian treasury declined to give details of the meeting, but traders were encouraged that Beijing might use its financial muscle to help the eurozone.
News of the talks came as Barack Obama warned that the world economy would suffer badly if Spain and Italy were sucked deeper into the European debt crisis.
"Greece is obviously the biggest immediate problem. And they're taking some steps to slow the crisis but not solve the crisis," Obama said, at a roundtable of Spanish journalists in Washington. "The bigger problem is what happens in Spain and Italy if the markets keep making a run at those very big countries," the president added.
Despite confirmation of the China talks, Italy was forced to pay record levels when it sold €6.5bn (£5.6bn) of government debt on Tuesday morning. The yield, or interest rate, on Italian five-year bonds rose to 5.6% at the auction, a euro-era record.
Italy's borrowing costs had also jumped on Monday amid fears that Greece could default on its debts and fall out of the eurozone.
Back
in June, Chinese premier Wen Jiabao said China could offer "a helping
hand" to Europe by investing in sovereign bonds. Analysts, though,
questioned whether China would provide a significant amount of funding
for troubled European countries.
"We have heard this story before with regard to the likes of Spanish and Portuguese bonds and in the end it was the European Central Bank buying and EU bailouts that seemed to have taken place rather than anything with a Chinese influence," said Gary Jenkins, head of fixed income research at Evolution Securities. "If it really came to pass then it would provide an immediate confidence boost. I just won't hold my breath."
Silvio Berlusconi's government is pushing an austerity budget through parliament in an effort to cut its deficit and persuade the financial markets that it remains solid. But the plan has been dogged by political infighting.
Robert O'Daly of the Economist Intelligence Unit warned that a deal with China would only buy Italy limited time.
"To restore market confidence the Italian government will have to put aside its internal wrangling to implement the programme of fiscal austerity presented to parliament on 1 September and at the same time come up with a coherent medium-term strategy to improve the country's dismal economic growth performance," O'Daly said.
"Given the differences within the ruling coalition and prime minister Berlusconi's ongoing problems with the judiciary that does not seem likely to happen," he added.
News of the talks sparked a rally in Asia, where Japan's Nikkei closed nearly 1% higher. But European markets saw further losses, with the FTSE 100 down 44 points at 5084 in mid-morning trading.
In the bond markets, the yield – interest rate – on 10-year Greek debt hit a new record high of 25% in early trading. UK government bonds rose in value again, pushing down the yields on the 10-year gilt to another record low of 2.175%.
The Italian government confirmed on Tuesday that Giulio Tremonti had met the head of China Investment Corp, the country's sovereign wealth fund, in Rome last week. It is understood that Tremonti asked the Chinese delegation to consider buying Italy's sovereign debt and making strategic investments in Italian companies.
The Italian treasury declined to give details of the meeting, but traders were encouraged that Beijing might use its financial muscle to help the eurozone.
News of the talks came as Barack Obama warned that the world economy would suffer badly if Spain and Italy were sucked deeper into the European debt crisis.
"Greece is obviously the biggest immediate problem. And they're taking some steps to slow the crisis but not solve the crisis," Obama said, at a roundtable of Spanish journalists in Washington. "The bigger problem is what happens in Spain and Italy if the markets keep making a run at those very big countries," the president added.
Despite confirmation of the China talks, Italy was forced to pay record levels when it sold €6.5bn (£5.6bn) of government debt on Tuesday morning. The yield, or interest rate, on Italian five-year bonds rose to 5.6% at the auction, a euro-era record.
Italy's borrowing costs had also jumped on Monday amid fears that Greece could default on its debts and fall out of the eurozone.
Helping hand? Ha Ha Ha
"We have heard this story before with regard to the likes of Spanish and Portuguese bonds and in the end it was the European Central Bank buying and EU bailouts that seemed to have taken place rather than anything with a Chinese influence," said Gary Jenkins, head of fixed income research at Evolution Securities. "If it really came to pass then it would provide an immediate confidence boost. I just won't hold my breath."
Silvio Berlusconi's government is pushing an austerity budget through parliament in an effort to cut its deficit and persuade the financial markets that it remains solid. But the plan has been dogged by political infighting.
Robert O'Daly of the Economist Intelligence Unit warned that a deal with China would only buy Italy limited time.
"To restore market confidence the Italian government will have to put aside its internal wrangling to implement the programme of fiscal austerity presented to parliament on 1 September and at the same time come up with a coherent medium-term strategy to improve the country's dismal economic growth performance," O'Daly said.
"Given the differences within the ruling coalition and prime minister Berlusconi's ongoing problems with the judiciary that does not seem likely to happen," he added.
News of the talks sparked a rally in Asia, where Japan's Nikkei closed nearly 1% higher. But European markets saw further losses, with the FTSE 100 down 44 points at 5084 in mid-morning trading.
In the bond markets, the yield – interest rate – on 10-year Greek debt hit a new record high of 25% in early trading. UK government bonds rose in value again, pushing down the yields on the 10-year gilt to another record low of 2.175%.
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