In a move which would have been inconceivable just a few years ago it has been revealed that the BRICS have agreed to cooperate with the International Monetary Fund with regards to the creation of a multibillion-dollar bailout fund to assist the Eurozone. While this is most certainly a welcome addition to the ever growing band of supporters of the IMF it is most certainly something of a surprise to many in the investment arena.
What is the BRICS?
The BRICS is an association of emerging economies which takes in Brazil, Russia, India, China and South Africa. These are economies which continue to perform exceptionally well even in these difficult economic times and many people believe the likes of Brazil and China, and possibly India, will become economic powerhouses in the years ahead.
For many years the BRICS were very much left to fend for themselves and in many ways the European Union were dismissive of their growing stature. We have seen a number of trade disputes between the European Union and the BRICS although the ongoing collapse of the Eurozone and the euro have forced European leaders to effectively go cap in hand to BRICS members via the IMF.
What has been agreed?
The IMF is in the process of creating a $430 billion bailout fund which it is hoped will be enough to save the Eurozone and the euro. The headlines over the last few weeks have been dominated by the likes of Spain and Italy with their economies in dire need of additional funding and outside help. So far we have seen a number of piecemeal attempts to paper over the cracks of the Eurozone and many believe it will be the introduction of the International Monetary Fund bailout fund which will eventually put the minds of investors at rest.
The BRICS have agreed to contribute $75 billion between the five members although China, with $43 billion, is by far and away the largest contributor amongst the BRICS members. At this point in time it is unclear exactly what BRICS members will get out of the deal but no doubt the small print will be released into the public domain in due course.
The ever-growing influence of the BRICS members
Even the merest of glimpses at members of the BRICS such as Brazil, Russia and South Africa show a number of countries which in years gone by had been dismissed as “financial basket cases”. There is no doubt that a large number of the BRICS members have had more than their fair share of financial woes over the years although they have come back stronger than ever and the association has obviously helped put individual members back on the financial map.
If each individual BRICS member was forced to negotiate trade arrangements with larger counterparts they would probably lose out in the long run. However, there is no doubt that as a larger association they have more power and more sway and the ongoing economic challenges within Europe have certainly opened up an opportunity which they have been very quick to recognise.
Saving the worldwide economy
While there is no doubt that the additional investment by BRICS members will greatly assist the International Monetary Fund’s effort to drag Europe kicking and screaming from the current financial crisis there is also no doubt that the BRICS members also have a vested interest. If the worldwide economy was to continue along its current path of financial destruction then at some point there would be a growing impact upon economies such as Brazil, Russia, India, China and South Africa. So while on one-handed it looks like a very generous donation there is no doubt it will also benefit the BRICS members in the long-term.
There is also speculation that BRICS members will use the ongoing economic crisis within Europe to strengthen their hand on the worldwide trading stage and renegotiate existing deals. In many ways their European counterparts are not in a position to refuse any offers of help and any request to renegotiate existing deals. This is the ruthless arena of international trade and in many ways we are approaching a situation of “what goes around comes around” with their European counterparts having played hardball in the past.
Will the IMF bailout fund be enough?
There is intense speculation that the German government is softening its stance with regards to the potential purchase of troubled economy bonds in the money markets. This, together with the IMF bailout fund, may well just be enough to avert a catastrophe in Europe and a disaster for the worldwide economy. However, so far European leaders have failed to manage this particular crisis with any credibility and investors will wait to see the colour of their money before deciding whether the worst is over.
The more worldwide economies which come together to aid the ailing European economies the more confidence this will give to the investment arena. The more confidence investors have in the future of the Eurozone and the Euro the less pressure upon sovereign debt yields. At this moment in time there is speculation about a major rescue package and as a consequence Spanish sovereign debt yields have fallen back from the critical 7% level. Indeed there has also been a reduction in Italian sovereign debt yields which were fast approaching the 7% tipping point at which a rescue package would have been highly likely.
In may have taken some time for the BRICS members to come forward with their $75 billion contribution to the IMF bailout fund but there is no doubt they will use this as a very powerful trading tool. On one hand BRICS members cannot afford a worldwide economic slump while on the other they will use their $75 billion contribution to expand existing trade arrangements and potentially renegotiate the terms of those agreed some time ago.
The tables have certainly turned on European leaders over the last few months and after playing hardball with BRICS members in the past we are now in a situation of “what goes around comes around”. Will European leaders regret playing the school bully in the past?