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Wednesday, April 20, 2011

Spain and China: a whirlwind romance gone wrong?

Last week the news was full of talk of a new economic alliance between Spain and China, following Jose Zapatero’s visit to Beijing. Zapatero spoke of promises by the Chinese government to continue buying billions of euros worth of Spanish government debt. There was even some chatter about a substantial $13bn investment by the Chinese sovereign wealth fund (CIC) combined with private investors. It looked like a match made in heaven.

Alas, as with many whirlwind romances (we felt one night stand might be a bit harsh), everything was not as it seemed. As often is the case, one partner (Spain) seemed much keener on the whole arrangement than the other, and went off touting the new relationship to its friends (the Spanish and European media in this case). Unfortunately, the other partner was looking for a more ‘at arm’s length’ type deal and China began to distance itself from the rumours. The whole charade was put down to “an error of communication”.

Spain was eventually forced into a slightly humiliating retraction of Zapatero’s initial statement and an awkward silence has since prevailed. Despite being a slightly comic interlude to the ongoing depression of the eurozone crisis this whole situation highlights that there is no easy answer for Spain. It needs to continue with its economic reforms and spending cuts, and maybe markets will continue to support it. This is especially true now that the hope of finding a sugar daddy to help fund it over the next few years has been ruled out (although we’re fairly sure America has dibs on China’s funding of debt anyway).

(H/T to FT Beyondbrics blog for the brilliant metaphor)


Rollo said...

Any one who buys Spanish bonds is an idiot who does not understand the situation; or has ulterior motives not related to economics. For all their many faults, the chinese leadership are not idiots; and it is hard to see how much they will gain by becoming bad bankers like the ECB. So it is not surprising to hear their silence now.

Anonymous said...