EU must get firm grip on debt crisis

Time for decisive action by Europe, G20: Official

China urged Europe and the upcoming G20 summit to reach a "timely" and "decisive" consensus to prevent the European financial crisis from spreading, Vice-Minister of Finance Zhu Guangyao said on Monday.

"We have to admit that, at present, the eurozone is faced with severe challenges, as the debt crisis deteriorates," he said at a news conference on the G20 which will be held on June 18 to 19 in Los Cabos, Mexico. President Hu Jintao will attend the summit.

"We hope the summit will target the major problem in the world economy and come up with stable and powerful responses," Zhu said.

China expects Europe to address the issues of debt more decisively, although the European Union and the European Central Bank were taking important steps to tackle it, he said.

China will "not be absent" from plans to add $430 billion in funds to the International Monetary Fund, said Zhu Jun, deputy head of the People's Bank of China's international department, without elaborating on how much China would inject into the fund.

"China has been constantly supporting the IMF to play a positive role in solving the European debt crisis," she said, adding the capital input should be primarily based on a country's voting power in the IMF and further reform of the fund should reflect a greater say for emerging economies.

China believed that Europe had the capability to overcome the crisis, and is ready to strengthen cooperation with Europe and the IMF under the framework of the G20, Zhu Guangyao said.

Eurozone finance ministers agreed on Saturday to provide Spain with a loan of up to 100 billion euros ($125 billion) when the country formally requests it later this month, making it the fourth country to seek assistance since Europe's debt crisis started, following Greece, Ireland and Portugal.

The EU and IMF have committed a total of about 500 billion euros to finance bailouts across the region.

Zhu Guangyao said he hoped the weekend's decision would help contain Europe's debt crisis, and China welcomed "decisiveness" from the EU.

"Markets should react favorably to this deal," however there are a number of factors to be considered, including the Greek election on June 17, said Douglas Borthwick, managing director of foreign-exchange consultants, Faros Trading.

"Anxiety over the region and the associated questions will continue," Borthwick said.

China faces a rising risk of further economic slowdown amid European debt woes. Europe is its largest trade partner. Growth in the world's second-largest economy slowed down to 8.1 percent in the first quarter, the weakest in nearly three years.

In May, demand from the EU recorded the first positive year-on-year growth rate in three months, and exports to the US grew by 23 percent, together driving China's export growth to 15.3 percent, well above market expectations.

"However, given the weak export readings in the purchasing managers' index and the recent deterioration in economic data in both the US and Europe, we are far from confident that this improvement will prove durable," said Yao Wei, China economist at Societe Generale SA.

Zhu Guangyao said that China supports Greece staying in the eurozone, but Beijing has already made plans for the worst-case scenario.

Seeing "big" risks and low returns, China is unlikely to buy eurozone bonds, even if they are part of a resolution of the European debt crisis, the Wall Street Journal reported last week, citing Lou Jiwei, chairman of China Investment Corp, the country's $410 billion sovereign wealth fund.

The company has reduced its stock and bond investments in Europe, he said.

"Something must be done on the level of country debts in Europe and there are only painful alternatives left," said Bjorn Hultin, an independent political consultant and managing director at the Brussels-based Intercity Consulting.

"The crisis is all about banks," he said. "If the nations fail to pay their debts, the banks will be attacked since they are exposed. If there is a risk that the banks will fail, the depositors will be scared. In that case, a run on the banks could happen. Or the banks will not trust each other for payments and the whole system could crumble down."

The European Commission proposed a bank recovery and resolution directive for all EU countries earlier this month, seeking to equip member states with a common framework to deal with bank failures while avoiding moral hazard and protecting financial stability and public finances.

"If adopted, covered bonds as a secured liability of the issuing bank will be excluded from any write-down facing unsecured creditors of the same bank, a credit positive," Moody's Investors Service Inc, a leading ratings agency, said on Monday in its weekly credit outlook.

President Hu Jintao will visit Denmark, the holder of the rotating EU presidency, from June 14 to 16, Vice-Minister of Foreign Affairs Song Tao said at the news briefing on Monday.

This will be the first visit of a Chinese president to Denmark.