BRIC Loans to EU: An absurd idea

The growth of emerging markets is certainly gratifying, but to assume that there is such a thing as an economic bloc of BRICS—or that it should be loaning money to help out Europe is simply absurd

This week, as part of the ongoing sovereign debt crisis affecting the euro, we were treated to a suggestion by Brazil's finance minister, Guido Mantega, that as part of their meeting on 22nd September in Washington, the senior officials from the BRICS (Brazil, Russia, India, China, and South Africa) should hammer out a possible rescue plan for Europe.
Brazil's President Dilma Rousseff seconded the suggestion and encouraged the proposals for an "international effort" to help rescue Europe from its debt crisis. Pundits loved the idea as evidence of a major shift in the balance of the global economy toward emerging markets.
There is no question that the global economy has shifted in favour of emerging markets. The combined output of the developing economies is now 38% of world GDP (gross domestic product), double what it was twenty years ago. Their exports have also almost doubled in the same time period and make up a little more than half of the world's exports and 47% of its imports. This growth is certainly gratifying, but to assume that there is such a thing as an economic bloc of BRICS or that it should be loaning money to help out Europe is simply absurd.
Brazil, India, Russia and China certainly have the money to make a difference. Their foreign reserves are about $300 billion for India, $350 for Brazil, almost half a trillion dollars for Russia and over three trillion dollars for China. All of this cash needs to go somewhere. In the past it was usually invested in United States Treasuries, but with the ultra-low interest rates and the depreciation of the dollar, that no longer looks like a good bet. No doubt there have been attempts to diversify.
Increasing gold reserves has been popular recently. But with gold at a historic high, this might be a better time to sell rather than buy. The politicians who run these funds don't quite see it that way. They are again putting their money into an asset that rises for no other reason than people think it will rise.
Then there is the irony of some rather poor countries bailing out some of the richest. On a per capita GDP basis, Greece, one of the poorest of the euro-zone members, ranks 28th in the world. The highest ranking BRIC is Russia who comes in at number 50. Brazil is about average at 75. China and India are in the bottom half at 95 and 130 respectively. Greece's average income at $28,000 is a little less than twice Russia's, almost three times Brazil's, four times China's and eight times India's.
Then there is the question as to why these reserves are so large. Large reserves of foreign currency allow a government to stabilise foreign exchange rates and put it in a better position to defend itself from speculative attacks on the domestic currency. But there can be large costs. China has maintained huge dollar reserves and its losses have been proportional as the dollar has declined.
China's reserves are not necessarily the result of a foresighted economic policy designed to create sustainable growth. On the contrary, it is part of a policy of investment-led growth stimulated by artificially cheap financing and currency manipulation. The result of this intervention into the market is a massive misallocation of capital that could very well result in a long post-boom period of stagnation.

Besides, China has no reason to invest in the euro. They are simply a bad investment. The yield is next to nothing and they might default. China has been investing in euro-bonds, but prudently only buys German bunds.
Russia too has demurred. It correctly points out that the Europeans really have not yet produced a clear strategy. These doubts did not stop Russia from negotiating a $3.4 billion dollar bailout for EU member state Cyprus. Cyprus has a banking sector that is seven times larger than its GDP and much of that is Russian money of dubious origin. Since Cyprus is Greek, its banks are among the highest holders of Greek sovereign bonds in Europe. So Russia was just looking out for its own.
So what are these loans really about? The Nobel laureate Paul Krugman in his book "Pop Internationalism" explains that firms compete, countries do not. Companies from America and China compete for customers, but if the Chinese firms do better it does not necessarily follow that China is winning. What countries or at least their politicians compete for is something else: status and power. The problem is that status and power may not have any economic value. The US has discovered if not learned that the pursuit of status and power can be exceptionally wasteful and expensive. Perhaps Brazil will make a similar discovery if it is foolish enough to proceed.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected]  or [email protected]).



Shadi Katyal

6 years ago

The idea might ludicrous but facts are there and as a matter of fact India loaned $2 Billions for this cause.
China is already financing USA debt in Trillions.
Brazil has invested in Europe and USA.
After all we all developed our industries with their finance and maybe it is time for payback.
Leaving all aside one must consider that these are the biggest consumer markets who we trade with and thus we all will suffer if we didn't help each other.
True the appetite of deficit budget must be curbed so world doesn't run into such crisis again

FY11-12 growth will be close to 8%: Rangarajan

PMEAC chairman C Rangarajan, who had earlier pegged GDP growth at 8.2% in FY11-12, said the industry may not do as well as policymakers initially expected, though the agricultural sector may do better on the back of a good monsoon

Hyderabad: Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan has projected that the country’s gross domestic product (GDP) growth will be close to 8% this fiscal and inflation will continue to rule at high levels for the next 3-4 months, reports PTI.

The PMEAC chairman, who had earlier pegged GDP growth at 8.2% in FY11-12, said the industry may not do as well as policymakers initially expected, though the agricultural sector may do better on the back of a good monsoon.

“The GDP growth rate will be close to 8%. And industry may not do as well as we thought earlier. However, agriculture will do better. Services will continue to do better. Therefore the overall growth rate can remain close to 8%,” Mr Rangarajan told PTI on the sidelines of a Genome Foundation meeting here.

Finance minister Pranab Mukherjee recently expressed disappointment over the slowdown in the country’s GDP growth rate, which was pegged at 7.7% in the first quarter of FY11-12, down from 8.8% in the corresponding quarter a year ago.

In line with the trend, the Asian Development Bank (ADB) has slashed its growth forecast for India in the current fiscal to 7.9% from 8.2% in the previous fiscal on account of the subdued growth of major economies worldwide and rising crude oil prices.

Concerned over high inflation, which stood at 9.78% in August 2011, the Reserve Bank of India (RBI) recently raised key interest rates by 25 basis points, its 12th such hike since March 2010.

Following the increase, the short-term lending (repo) rate stands at 8.25% and the short-term borrowing rate (reverse repo) is 7.25%.

“But for the next three or four months, it is likely to remain at higher levels. However, beginning January 2012 it can show definite signs of decline and by March, it could be closer to 7%,” the economic advisor said.

Mr Rangarajan, however, hoped that interest rates may come down in six months, as inflation is expected to be tamed by then. In contrast, the ADB’s ‘Asian Development Outlook 2011 Update’, which was released three days ago, raised its end-March 2012, inflation forecast to 8.5% from 7.8% earlier.

According to Mr Rangarajan, higher interest rates may hurt the sentiment in some sectors like retail and manufacturing.

However, growth in the manufacturing sector may remain at 7%, as projected earlier, he said.

“Raising interest rates has become necessary because of the high level of inflation. Therefore, I believe that some segments of industrial production are more sensitive to the changes in interest rates. Particularly, the retail sector is sensitive to the interest rates,” he explained.


Steel demand to grow by 70% to 113 MT by 2016-17

A panel chaired by the steel ministry, and comprising representatives of leading steel-makers and associations, estimated that steel demand would grow by 10.3% annually if India maintains a 9% GDP growth rate, in the 12th Plan

New Delhi: India’s steel demand is likely to jump by over 70% to 113 million tonnes (MT) by the end of the next Five Year Plan, with the infrastructure sector projected to witness investments worth $1 trillion, reports PTI.

A panel appointed by the steel ministry to assess demand and supply of steel in the 12th Five Year Plan (2012-17) has estimated that steel demand would grow by 36 MT during the period to touch 113 MT in its final year, a source in the ministry said.

India’s total steel demand stood at 65.61 MT last fiscal.

The panel chaired by the steel ministry’s financial advisor, S Machendranathan, and comprising representatives of all leading steel-makers and associations, estimated that steel demand would grow by 10.3% annually if the country maintains a 9% gross domestic product (GDP) growth rate, as projected by the Planning Commission in its Approach Paper for the 12th Plan.

As per its projections, demand for steel will amount to 77.3 MT by 2012-13, 85.05 MT by 2013-14, 93.6 MT by 2014-15, 103.05 MT by 2015-16 and 113.3 MT by 2016-17.

However, the panel does not see a need for increased imports of steel to meet India’s growing demand, as the domestic industry is slated to add 40 MT of additional finished steel-making capacity during the 12th Plan, taking it to 115.3 MT by 2016-17 from 75.3 MT in FY12-13.

It estimates that imports of steel will gradually come down to 5 MT by 2016-17 from 6 MT in 2012-13 and exports to see a sharp rise from 4 MT in 2012-13 to 7 MT by 2016-17.


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