FT's China reserve report hurts euro

09:19, May 27, 2010      

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A report by the Financial Times (FT) yesterday that China might consider reducing its euro-denominated debts sent European currency down, The Reuters said.

U.S. Treasury Secretary Timothy Geithner and Italian Prime Minister Silvio Berlusconi sought to support the battered euro Wednesday, but the currency extended its decline on a report that China was reviewing its euro holdings, the Reuter report said.

Geithner told Europeans that financial markets want to see euro zone put into action their US$1 trillion standby package designed to stabilize the currency, and Berlusconi called on European partners to follow his lead and impose austerity to help solve European crisis.

But a Financial Times report injected new uncertainty. The British newspaper's website said representatives of the Chinese entity that manages foreign reserves had met with foreign bankers in Beijing recently to discuss Chinese exposure to euro zone debt.

That contributed to the euro's third straight day of decline versus the U.S. dollar, pushing it toward a four-year low.

China has been looking to diversify its largely dollar-denominated holdings, so any potential shift away from the euro could add to nervousness about the European crisis.

Geithner, on a visit to London, also urged European countries to work for a globally consistent approach to financial reform.

After talks with his British counterpart, George Osborne, Geithner said of the EU plan to support indebted states: "It's a good program (and) has got all the right elements. What markets want to see is action."

The fund would provide heavily conditioned loans to euro zone governments that had difficulty borrowing on capital markets.

European shares rallied as much as 3.5 percent from Tuesday's nine-month lows before paring gains to 2.4 percent on the session. Wall Street indexes wilted in late afternoon trading and the Dow closed below 10,000.

Berlusconi sought to support the euro with a vigorous defense of his government's 25 billion euro (US$30 billion) austerity package, approved by his cabinet in an emergency decree late on Tuesday.

Italy joined Spain and Portugal in pushing through spending cuts to limit contagion from the Greek crisis.

Like those countries, Italy also antagonized labor. The largest Italian union announced plans to strike, saying the measures would hit the poorest workers hardest and spare the rich.

"The sacrifices required are indispensable to save the euro," Berlusconi said, calling Italy's spending cuts less draconian than those approved by most of its EU partners. "For years, Italy -- like many countries in Europe -- lived above its means. We are all in the same boat."

Fears that Europe's debt crisis could engulf some banks have made them reluctant to lend to each other as happened during the 2007-09 financial crisis, The Reuter report said.

By People's Daily Online / Agencies


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