China Holds €25 Billion In Spanish Debt, Will Continue To Purchase Bonds, To Take Part In Cajas Restructuring

Submitted by Tyler Durden on 04/12/2011 07:32 -0400

• Borrowing Costs
• Portugal
• Reuters
• Risk Premium
• Sovereign Debt
• Wen Jiabao

And so we get the latest confirmation that China is now very invested in the Euro, ostensibly at the expense of the US Dollar. According to the Spanish government, China already holds €25 billion in Spanish debt, which explains where Chinese foreign buying interest has gone (most certainly not to US Treasurys) in 2011 (certainly not toward purchasing US Debt, where Chinese holdings have barely moved recently). Additionally, China, as Spain's soon to be largest creditor, has said it will help fund a restructuring of the Cajas debt: after all there is nothing better than consensual pre-petition arrangement between creditor and insolvent debtor.
From Reuters:

"China has shown itself to be a very good friend to Spain as we've confronted the difficulties of the financial crisis, which fortunately are being solved," Spanish Prime Minister Jose Luis Rodriguez Zapatero told Spanish radio stations from Bejing.

The Spanish source told Reuters that Chinese Premier Wen Jiabao did not mention any specific investment amounts at the bilateral meeting on Tuesday.

China holds 12 percent of Spanish sovereign debt that is in foreign hands, the source said.

Spain's borrowing costs have soared since early last year on investor concern that it might follow other euro zone periphery countries down the road to a bailout.

Decoupling?

But in recent weeks it has decoupled from Portugal, which has asked for European financial aid, and the risk premium on Spanish bonds compared with German benchmark debt has narrowed. On Tuesday it stood at 172 basis points, its narrowest level since early November.

Zapatero is on a three-day visit to China and Singapore where he has meetings scheduled with Chinese Vice Premier Li Keqiang and President Hu Jintao.

He will meet with bankers and fund managers in Singapore on Wednesday to show them data on Spain's economy and finances to argue the case for investing in Spain .

Spain's weak savings banks, crippled by property loans that soured, are seeking investors as the government has forced them to recapitalise and tried to fight off the spectre of a big state bailout for the financial sector.

Of course, since there is no such thing as a free lunch, Spain is now prepared to sell Ibiza to Beijing for 75% off. And far more importantly, with Chinese indirect investments all over Europe now, it explains why the Chinese government is far more set on seeing a strong EUR than a dollar, which even the PBoC appears to have given up on. Lastly, China is absolutely making a political statement with the disclosure of its Spanish bond purchases, making it all too clear that surplus economies have alternative to the USD when recycling trade dollars.