Viewpoint: Brics bailout of Europe is unlikely

Wen Jiabao
Image caption China's Premier Wen Jiabao has said it is important to stop Europe's debt crisis from spreading further

Consider a situation when the richest families in your city, unable to meet the expenses of their high standard of living and unable to agree among themselves on a future direction, ask you, a lower middle-class citizen, for a loan.

The amount required is not fixed, the guarantee of return not certain, but the virtue of saving your city is visibly high, even though you are having trouble making your own ends meet because the situation was created by the rich in the first place.

This is exactly what the idea of the "Brics" - the collective name for the world's fastest-growing large economies: Brazil, Russia, India, China and (sometimes) South Africa - bailing out Europe's troubled economies sounds like.

After living beyond their means for years, the Europeans have had a rude awakening of their highly leveraged balance sheets. Greece alone requires $17bn (£10.8bn) in its next instalment of the $150bn promised in May 2010 to stay afloat.

If Italy, which has twice as much as debt as Greece, were to follow, the amount required for bailing it out remains anyone's guess.

Among the Brics, China is the only country with enough capital to even consider a bailout.

With $3.2tn in reserves, China dwarfs the other four, whose reserves add up to little over $1.2tn - Russia ($533bn), India ($319bn), Brazil ($353bn) and South Africa ($50bn). If the external debt positions are factored in - $300bn for Brazil, $305bn for India - it doesn't leave much for investment.

Disparate reasons

How then, is the idea of a Brics-led bailout of Europe's troubled economies even conceivable? Perhaps there are macroeconomic reasons.

Brazil's foreign exchange reserves are mostly a result of their central bank's purchase of dollars being poured in by foreign investors. It may not want its source of capital to dry up.

The Chinese reserves are fuelled by similar intervention by their central bank to maintain their currency and, of course, their exports. Given that the European Union is China's largest trading partner at close to $400bn, they have a vested interest in saving their client base.

India's foreign investment inflows have dropped to $60bn this year from $70bn in 2010. It would not want the crisis to spread and affect revenues of its export-oriented industries, such as IT, which gets close to 30% revenues from Europe.

Finally, the volatility in oil prices has affected Russia, for whom oil remains its primary export and foreign exchange earner. Thus Russian participation, if any, would be driven by the oil marketplace.

Bigger role

Image caption The foreign exchange reserves of Brazil, India and Russia are far less than China's

If the macro interests and capabilities are so disparate, does Brics as a group even have a role to play?

If the eurozone, which is a monetary grouping, has had difficulty in co-ordinating a fiscal response, how is Brics, which is still an emerging alliance, expected to co-ordinate a bailout?

They don't have a co-ordinated strategy for managing their sovereign wealth funds. Brazil, China and Russia have one, whereas South Africa and India do not. Neither has there been any hint of the countries agreeing on converting additional portions of their reserves into euros.

One way to add to the loan pool immediately would be to contribute to the IMF's New Arrangements to Borrow programme. Brazil was a beneficiary of this in 1998.

A second way would be to buy eurobonds, issued by the European Financial Stability Facility and backed by the member states.

Bargaining tool?

Regardless of the instruments available, since the financial strength is missing, this decision is increasingly looking symbolic. But even symbolic decisions need political will and tangible benefits in return.

Brazil can use the opportunity to further its claim for a United Nations Security Council seat, even though this investment seems tangential to new President Dilma Rouseff's socialist agenda.

The Russians have been burnt by two crises, in 1998 and 2008, resulting in a devalued currency and diminishing reserves. They may be reluctant saviours.

India, burdened by its own socioeconomic woes, cannot afford symbolic moves. The $17bn instalment for Greece alone is equal to the total budget of India's National Food Security Bill for one year.

Perhaps it is time to let businesses instead of countries participate in the bailout. According to a report in the Guardian newspaper, headlined "Debt-ridden Greece gets vote of confidence from China", Chinese company Cosco has already signed a $1bn deal to manage the Piraeus dockyard and is considering buying a stake in the railway network OSE.

This confirms predictions that China is peeling itself away from Brics in making investment decisions. Hence, Greece and Italy are courting China. This kind of strategy is something other Brics nations should consider.

Whether the decision is financial, political or symbolic, Brics must at least consider whether it is worth bailing out Greece.

During the 1990s Asian financial crisis, the IMF forced Asian economies to stop saving the currency and the banks and introduce structural adjustments in return for IMF loans.

Many institutions went bankrupt and individuals lost their wealth in the process. Why should it be any different now?

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