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China likely to aid in European debt deal

November 1, 2011

After reaching a deal in late October that will, among other things, require banks holding Greek debt to take a 50 percent loss, European leaders are now faced with the task of coming up with the cash needed make this deal a reality.  Billions, if not trillions, of euros will be needed to recapitalize sinking Greek and European banks and to prevent the spread of the so-called “Greek Disease.”  The European Financial Stability Facility (EFSF) will be quadrupled in order to fuel this latest bailout, which aims to protect banks against future losses resulting from government default and to address the more immediate problem of Greek debt.

Europe will not be able to come up with the cash on its own—even Germany is too strapped (or simply unwilling) to provide more financial help to its southern neighbors and to floundering European banks than it already has.  The International Monetary Fund (IMF) and World Bank have agreed to continue providing funds to the EFSF and European banks, but the real bulk of the money will come from further east—from Russia, Japan, and China.

According to an Op-Ed piece in The New York Times by Arvind Subramanian, Nicolas Sarkozy of France recently called on President Hu Jintao of China to provide monetary support to the EFSF.  The chief of the European Financial Stability Facility, Klaus Regling of Germany, flew to Beijing to meet with China’s central bank and finance ministry just one day after the 17 eurozone countries reached a bailout deal. Regling spoke at a news conference after his meeting with Chinese officials, who are expected to heavily invest in Europe. For a summary of the recent talks in China, check out this video:

The question remains though, “what does China want in return for its support of the EFSF?”  The details of China’s contributions to the bailout fund remain unclear, but Subramanian believes their contribution “could represent a major change in the global landscape: the consolidation of China’s economic dominance at the expense of the status quo powers—the United States and Europe.”

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