Europe is Running Out of Time

The stresses in the Eurozone increased over the weekend, intensifying a crisis that has been raging for months. A Greek default looks increasingly likely, as the willingness of the German public to bail out the PIIGS has deteriorated in recent weeks. On Monday, news broke regarding a possible Chinese purchase of Italian government bonds. Speculation had been building over the past several months that China would purchase troubled European debt in an effort to stabilize the region. China—with its massive foreign reserves—has the ability to conduct such an endeavor. It may have the desire, as these reserves are largely denominated in U.S. dollars. As the U.S. dollar has weakened in recent months (and may continue to decline further) China may be looking to safe-guard its assets by diversifying into European bonds. China may also become the lender of last resort. If the European Central Bank is unwilling to provide the funds the PIIGS require, China may be the only nation with sufficient capital, especially with German taxpayers unwilling to cooperate. Interestingly, although China's actions may help to stabilize the situation in the near-term, in the long run it may only make the situation worse. Assuming the PIIGS face structural problems and insolvency, it is likely that China will only sustain massive losses on any bond purchases that it makes. China's purchases may delay the collapse of Europe, then, but should it eventually occur, it could spread a financial contagion from Europe to Asia. If China assumes significant European debt, it would be tying its economy to the fate of Europe. That could be a recipe for disaster, both for China and the world.