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China to buy Spanish Debt

January 6, 2011

Today, NPR reported that China would buy about €6 billion (approximately $7.8 billion) worth of Spanish bonds.  In the short term, this is certainly welcomed news for Spain, as it has also been having trouble selling its bonds, with government bond interest rates have been raising dramatically compared to German rates.  The BBC estimates that Spain’s governments and banking sector will have to raise about €290 billion this year, and if Spain is forced to borrow at high interest rates, this would put a lot of strain on an already troubled Spanish economy.

While many EU voters may have wondered about the value of bailing out Greece or Ireland, a Spanish default would be a death blow for the euro.  Spain’s economy is twice the size of Greece, Ireland, and Portugal combined and the major European countries have major exposures in Spain (see The Interconnectivity of Europe’s Debt).  For instance, Germany was owed about $45 billion by Greece and $184 billion by Ireland, but $238 billion by Spain back in May.  This level of exposure is even worse for France, as Spain’s total debt owned by France was then almost twice that of Ireland and Greece combined.  Even the U.S. needs to worry about the Spanish economy, as NPR’s Planet Money explained on Tuesday, when it did an in-depth examination of the Spanish banking sector.

As a result, maybe everyone can breathe a little easier as China (whose economy is still growing rapidly) has decided to start buying large amounts of Spanish debt.  However, as Americans know, there are plenty of politicians who worry about China buying large amounts of U.S. Federal Government debt, and the U.S. has a bargaining advantage that the Chinese economy is dependent on American consumers.  For Spain however, the Chinese economy could already have been seen as part of the problem, since its cheap products have been replacing many locally produced in Spain.  As a result, perhaps Spain (and the EU) better be careful about this potential knight in shining armor.

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