Market Insider

Can the BRICS Countries Help Save the Euro Zone?

Monday it was China's turn, and Tuesday it was Brazil.

Euro coin in front of the giant symbol of the Euro outside the headquarters of the European Central Bank.
Thomas Lohnes | AFP | Getty Images

As markets react to each and every headline on the euro zone debt crisis, reports that China may be looking at investments in Italy drove stocks higher Monday, and talk from Brazil that BRICS countries are considering euro zone bond purchases rippled through markets Tuesday.

IMF chief Christine Lagarde called the idea of the emerging economies considering euro zone debt purchases an "interesting development."

Brazil Finance Minister Guido Mantega Tuesday morning said officials of the BRICS countries will meet in Washington ahead of next week's IMF meeting to discuss what they can do to help the EU with the credit crisis.

"We're going to meet next week in Washington and we're going to discuss how to help the EU get out of this situation," he said.

Mantega was quoted by Brazilian media as saying one option is for Brazil and the other BRICS countries—Russia, India, China and South Africa—to buy euro zone bonds, but those discussions among BRICs countries are in early stages.

On Monday, the Financial Times reported that Italian officials were talking to China Investment Corp about significant purchases of Italian bonds and strategic investments in Italian companies.

Some reports Tuesday said those discussions were only about investments in Italian companies. Italy, meanwhile, Tuesday paid a steep interest rate of 5.6 percent to sell 6.5 billion euros in 5-year bonds.

Separately, Aldo Luiz Mendez, a Brazil central bank official, was speaking before Brazil's legislature Tuesday afternoon. He was there to discuss how the Brazil Central Bank invests its reserves.

Mendez was quoted as saying the first goal is security, second is liquidity and third is return. He said return is not a determinant factor. What will determine investment is security, he said.

Seventy-one percent of Brazil reserves are currently in North American securities, and 18 percent are in European. He also noted that the euro currency has recently lost ground but other currencies, like the Australian and Canadian dollars are gaining ground.

"I would argue the central bank is (saying this) based on their analysis of the actual situation, but when you get to the Finance ministry, you are dealing with political issues. They may, if they think the risks are not too great, see support for euro zone debt as being a constructive way for Brazil to build its standing the global economy," said Robert Sinche, global head of currency strategy at RBS.

"Everybody—Brazil, China, emerging markets in general—have an interest in global stability. They want to export. if they think it's a reasonable process to become involved in selective debt markets more aggressively, as a way to build more stability in the global economic environment, I don't think it's an irrational decision, but it's as political one," said Sinche.

Australia accounts for 3 percent of Brazil's reserves, and Japan, 1 percent. Ninety-seven percent of Brazilian reserves are allocated triple-A securities, and 3 percent double-A.

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