China, Italy Discuss Sovereign Debt Purchases

With speculation of a Greek default intensifying by the minute, investors are left wondering the potential impact on other members of the PIIGS.

The country presently receiving the bulk of the attention is Italy, after it confirmed reports that it recently held discussions with China over the possibility of purchasing Italian government bonds to help stem the tide of the euro zone sovereign debt crisis.

A spokesman for Finance Minister Giulio Tremonti confirmed that there was a  meeting with the chairman of China Investment Corp., Lou Jiwei, but declined to provide additional details.  According to the Wall Street Journal and Financial Times, the meeting occurred in Rome last week.  Reports noted officials of China’s foreign currency regulator and the Cassa Depositi e Prestiti, an Italian government investment vehicle, also participated in the meeting.

News of the meeting helped boost the euro currency, which climbed 1.0% to 1.3708 against the U.S. dollar this afternoon.

Italian bonds yields have resumed their climb in recent weeks, with the ten-year yield currently trading near 5.57%. However, it remains below the 6.20% level reached in July, prior to the European Central Bank’s (ECB) decision to purchase Italian sovereign debt.

While the outcome of the meeting remains up in the air, Chinese support for Italy could alleviate short-term concerns but is unlikely to be a game changer over the longer-term.  At this point it should be clear to policymakers that governments are not bigger than the markets, and until the PIIGS are able to develop austerity measures that do not curtail economic growth, the crisis is likely to get even worse.