The BRICs: Europe's Next Lifeline?

Includes: BIK, BKF, EZU, FXE
by: Carlos X. Alexandre

With every passing day, we go from desperation to more of the same. Now the BRICs – Brazil, Russia, India, and China – are looking into lending a helping hand to the European debt crisis, or so it appears. As reported by The Australian, Brazil’s finance minister, Guido Mantega, suggested that the topic would be discussed on September 24 when they meet in Washington, D.C. From The Australian:

"We're going to see what we can do to help the European Union get through this situation," Mr Mantega told reporters.

If there is a direct connection between the BRICs and Europe, is the long-term relationship between Brazil and Portugal, and it doesn’t get any more intimate than that. Although some say that there’s resentment from Brazil toward its former colonial master, a bit of history is in order: Unlike other Portuguese colonies, where independence and self-rule was given to the natives – Angola, Mozambique, and territories in India among others -- Brazil’s independence was declared in 1822 by Peter I, the son of John IV, the king of Portugal at the time. For the sake of brevity, the real occupiers never left, and the countries are still blood-related.

In terms of immigration – legal and illegal -- Brazil is to Portugal what Mexico is to the U.S.A., and Mr. Mantega’s interest in helping the Union couldn’t hit closer to home. But the idea is a bit stale by now:

In the case of Brazil, President Dilma Rousseff told Portuguese officials months ago that her government could consider buying bonds or providing some other sort of aid for Lisbon, but so far neither has happened.

And I believe that the potential impact is completely misunderstood:

"Are they going to get together and promise $US100 billion of aid? Probably not," said Cornell University economist Eswar Prasad. "But if the emerging-market countries make a public show of buying the bonds, it could have a slight impact on confidence."

The assumption that BRICs, or any nation for that matter, carry any weight on the global stage to convince astute private investors to put their money in a pit is a far-fetched theory. After all, the current condition is derived from the private sector’s lack of trust in the ability of the public sector to do its job.

I know that China is viewed as the runaway train that will conquer the world, but once again some perspective is in order. Putting misleading and absolute numbers aside, and from a relative population and GDP measurement, Brazil’s economy is twice as strong as China’s, yet the Brazilian economy is only half as strong as Portugal’s, and everyone knows by now that Portugal is at the bottom of the European totem pole. In addition, while Portugal's debt to GDP is 93%, Brazil’s is far from perfect at 66%. China’s official number is 17%, but it has been challenged by many -- outside and inside China -- and the true number is thought to be closer to 100%.

But don’t China and Brazil have large foreign currency reserves? They do, but those reserves can be devoured by the needs of their populations like small brush in a wildfire when, not if, the temporary economic props stop delivering the goods, and the recent drop in Brazilian interest rates while inflation keeps increasing is an indication of the trouble in the horizon.

One may say many things about the BRICs, but I don’t think that they are stupid, and although they will not acknowledge the weak points, they are fully aware of the conditions that surround them. And that is why they're in no hurry to throw good money after bad.

Bloomberg reported that “Global Banks ‘Quietly’ Ask BRICs to Subsidize Greek Aid With $27.6 Billion,” and that only states that the private sector is shying away from the deal:

The Institute of International Finance Inc. has been “quietly exploring” whether the so-called BRIC countries and others would be willing to participate, IIF Deputy Managing Director Hung Tran said today in a telephone interview. The plan would add to a July 21 agreement that included debt buybacks and bond exchanges, he said.

It is true that $27.6 billion is a drop in the bucket and could be easily gathered among the BRICs. But all those concerned know that Greece is not the problem, and is only a symptom of a greater disease which calls for a much larger cash pill.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.