Euro debts: BRICS rescue plan beginning to take shape

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To stabilize the global economy after the Second World War, the United States entered a fixed exchange rate agreement with most of the rest of the major economies. It also bailed out Europe via the MarshallPlan.

At the highest heights of the ivory towers, you will hear that something similar is needed to pull the world from the clutches of the financial crisis.

China, with reserves worth more than $3-trillion (U.S.), would take on the role of the United States and use its wealth to help a group of struggling countries to right themselves. As was the case with the U.S. and the Marshall Plan, the primary motivation wouldn’t be charity. The goal would be to preserve markets for exports and to stave off a global depression.

News out of Brasilia Tuesday will make talk of a modern-day Marshall Plan less abstract. Brazilian Finance Minister Guido Mantega told reporters that his counterparts in the BRICS club of big emerging market nations – Brazil, Russia, India, China and South Africa – will discuss how they might help calm Europe’s debt crisis at a meeting in Washington on Sept. 22, which will precede a meeting of the larger Group of 20 the next day.

“We’re going to meet next week in Washington and we’re going to talk about what to do to help the European Union get out of this situation,” Mr. Mantega said.

This is a noteworthy development, coming only days after finance ministers and central bank governors from the Group of Seven industrial nations failed to instill financial markets with confidence that the world’s established powers have things in hand.

After spending much of the past year pointing fingers at the U.S. Federal Reserve and various G7 legislatures, the big emerging markets might finally have come to the conclusion that they have a more positive role to play in stabilizing the global economy.

“They are starting to recognize their own systemic influence,” said Gregory Chin, a senior fellow at the Waterloo, Ont.-based Centre for International Governance Innovation and a former Canadian diplomat in Beijing.

As the shining lights in an otherwise dim global economy, emerging markets are magnets for foreign capital.

A significant amount of this capital has ended up in various national treasuries as governments attempt to restrain upward pressure on their currencies. Various news outlets are reporting that the BRICS countries are discussing using their cash piles to buy more European debt.

They have the financial clout to make a difference. According to BMO Nesbitt Burns, the reserves of Brazil, Russia, India and China were almost identical to the debt of Portugal, Italy, Ireland, Greece and Spain at the end of the first quarter.

“Clearly, they aren’t going to buy all the debt, but a substantial purchase is certainly within the BRICS’ means and would go some ways to calming the crisis,” BMO’s Benjamin Reitzes said in a note to clients.

This effort could be less bold than it seems. The Financial Times is carrying a translation of an article in a Brazilian newspaper that says the BRICS would only purchase the debt of stronger European countries such as Germany and Britain, not Greece and Italy. And as Mr. Reitzes noted, China’s purchases of European peripheral debt over the past year haven’t been significant enough to make a big difference.

But China may not have a choice. Unlike at the end of the Second World War, there is no clear world order.

The U.S. was able to bankroll the reconstruction of European countries and Japan because these nations were devastated.

As hobbled as countries such as Greece and Portugal are, they aren’t on their knees. So imagine the political reaction to the prospect of becoming completely beholden to Beijing. China’s government, which has given up on several attempts to buy private assets in the U.S. and other western countries, has no interest in courting that kind of backlash.

“This is not so straightforward,” said Mr. Chin. “The timing becomes important. China knows they can’t overplay their hand.”

Just as the G7 sometimes veiled U.S. policy, the BRICS may provide just enough cover for China to assert itself into the rescue operation without becoming a distraction. That’s not the Marshall Plan. But it could be the start of something more fitting with the times.

KEVIN CARMICHAELWashington— Globe and Mail