Morning Note: Euro-Zone Debt Crisis Overblown?

Reports that China would buy Portuguese debt caught the attention of the Fast Money Traders this morning. A Portuguese paper, Jornal de Negocios, reported that China is seeking to purchase as much as five billion eurosworth of Portugal’s sovereign debt. China’s central bank did not comment on the report.

China’s emergence this week as the buyer of last resort of European debt raised the question of whether Europe’s crisis was one of confidence rather than a fundamental capital problem. Goldman Sachs’ Jim O’Neill has said that Europe’s borrowing costs have risen so sharply because of investors’ fears that better off European nations will be unwilling to bailout worse-off ones — not because Europe is more indebted than, say, the U.S. If China’s willingness to buy debt addresses those fears, then negative sentiment surrounding the euro could change quickly, cautioned Kanundrum Capital’s Brian Kelly.

Still, Kelly was maintaining his short position in the Euro as he did not believe that China’s would aggressively step in to help Europe until the continent’s situation further deteriorated. “If I was China, I would wait for Europe to get to the brink and then come in with a joint IMF rescue package in exchange for getting more say in the IMF,” Kelly said. “In my opinion, that is China’s end game here.”

Stephen Weiss, meanwhile, voiced concerns that Europe’s problems go deeper than a crisis of confidence. He argued that investors concerns are more about European governments’ willingness to cut state spending than bailouts. China buying EU bonds would not quell those fears so easily. “I am not so sure I agree with O’Neill’s crisis of confidence,” said the Short Hills’ Capital founder. “There are substantial differences between Europe and the U.S, such as Europe’s socialism tendencies.”

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