Tag Archive: European sovereign debt crisis


German Finance Minister Wolfgang Schäuble has every reason to smile. Zoom

German Finance Minister Wolfgang Schäuble has every reason to smile.

Germany has profited from the euro crisis to the tune of 41 billion euros in reduced interest payments. Strong demand for its debt has cut yields and made it cheaper for Germany to borrow. Meanwhile, the crisis has only cost Germany a mere 599 million euros thus far.

Germany is profiting from the debt crisis by saving billions of euros in interest on its government debt, which has enjoyed a steep drop in yields due to strong demand from investors seeking a safe haven.

ANZEIGE

According to figures made available by the Finance Ministry, Germany will save a total of €40.9 billion ($55 billion) in interest payments in the years 2010 to 2014. The number results from the difference between actual and budgeted interest payments.

The information was released in response to a parliamentary inquiry from Social Democrat lawmaker Joachim Poss.

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Steinbrueck Says Merkel Misleading Voters on Euro Debt Crisis

German chancellor candidate Peer Steinbrueck criticized Angela Merkel for misleading voters over the true cost of the European debt crisis, saying he’ll be upfront about the policy decisions needed after fall elections.

Steinbrueck, whose campaign to unseat Merkel on Sept. 22 has been riddled by gaffes and missteps, sought to use the first rally of his campaign to make a virtue out of his reputation for straight talking. Addressing a crowd of about 3,000 in Hamburg today, he contrasted his approach with Merkel’s “lulling” of voters, citing her stances on energy, the economy and on Europe.

Germany will have to come to Europe’s help and foot the bill if necessary,” the Social Democratic Party challenger told supporters, many eating sausages and drinking beer. “But that’s something Mrs. Merkel won’t tell you. It’s not enough to simply beat other countries over the head with the cudgel of saving; we need growth too.”

Steinbrueck, 66, has little more than six weeks to persuade voters he is better able to steer Europe’s biggest economy than Merkel, 59, as polls show Germans approve of her handling of the crisis. Recent surveys suggest he has begun to whittle down the lead held by Merkel’s Christian Democratic bloc. She returns to official engagements on Aug. 13 after her vacation, and is due to hold her first rally the next day in Hesse state.

‘Straight Talking’

The SPD challenger, who was Merkel’s first-term finance minister, chose Hamburg, his hometown and the only one of Germany’s 16 states where the SPD has an absolute majority, to try out his new format “Open Air Straight Talking” tour.

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Thousands blockade European Central Bank in Frankfurt (VIDEO, PHOTOS)

  RT

Published time: May 31, 2013 08:12
Edited time: May 31, 2013 13:50

The entrance of the ECB is blocked by over 3,000 ‘Blockupy’ protesters in a march against austerity. ‘Blockupy’ has announced the coalition has “reached its first goal” of the day.

Anti-capitalist protesters have taken to the streets of the financial heart of Frankfurt a day ahead of Europe-wide gatherings planned for June 1 to protest leaders handling of the three-year euro debt crisis.

“We call up everyone to join our protests.”

 

 

German riot police scuffle with protestors in front of the European Central Bank (ECB) head quarters during a anti-capitalism "Blockupy" demonstration in Frankfurt, May 31, 2013. (Reuters / Kai Pfaffenbach)

German riot police scuffle with protestors in front of the European Central Bank (ECB) head quarters during a anti-capitalism “Blockupy” demonstration in Frankfurt, May 31, 2013. (Reuters / Kai Pfaffenbach)

The ECB spokesman told The Guardian that the Blockupy protests have not disturbed day to day operations at the bank, but would not specify how many bankers managed to come to work.

Apart from those who amassed outside the ECB, a smaller demonstration took place at the nearby Deutsche Bank AG (DBK) headquarters, where around 50 police vehicles had been deployed. The protesters set off by midday.

The crowd, estimated at 2,500 by local authorities, clutched signs demanding ‘humanity before profit’.

Rain-soaked and dressed in ponchos, the crowd is equipped with a wide array of protest props- vuvuzelas, yellow wigs, pots and pans, and mattresses with the spray-painted slogan ‘War Starts Here’.

 

Image from twitter user@Migs_Bru

Image from twitter user@Migs_Bru

Blockupy’ has become a top-ten Twitter trend in Frankfurt, and at 10:09am (08:09 GMT), user Enough14 tweeted, “Strong Powerful blockade at Kaiserstr. Not one banker will come through here,” in reference to the ECB headquarters.

 

Read Full Article  and Watch Video Here

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    Image Source                           Angela Merkel, Chancelière allemande.

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Proper analysis of Mario Draghi’s figures suggests Germany is a major cause of the crisis – not a wage productivity paragon

Mario Draghi, president of the European Central Bank: his analysis of the euzozone crisis is flawed, argues Andrew Watt. Photograph: Lisi Niesner/Reuters

Over the course of the last week’s tense negotiations over a Cyprus bailout deal, much of the commentary has focused on the role of Europe’s finance ministers. But perhaps closer attention should be paid to Mario Draghi, the president of the European Central Bank. On 14 March Draghi made a presentation to heads of state and government on the economic situation in the euro area. His intent was to show the real reasons for the crisis and the counter-measures needed. In this he succeeded – although not in the way he intended.

Draghi presented two graphs that encapsulate his central argument: productivity growth in the surplus countries (Austria, Belgium, Germany, Luxembourg, Netherlands) was higher than in the deficit countries (France, Greece, Ireland, Italy, Portugal, Spain). But wage growth was much faster in the latter group. Structural reforms and wage moderation lead to success; structural rigidities and greedy trade unions lead to failure. QED.

According to the Frankfurter Allgemeine Zeitung, which reported the affair approvingly, the impact of Draghi’s intervention was devastating. François Hollande, the French president, who had earlier been calling for an end to austerity and for growth impulses, was, according to the newspaper, completely silenced after the ECB president had so clearly demonstrated, with incontrovertible evidence, what was wrong in Europe – or rather in certain countries in the eurozone – and what must be done.

Things are not as they seem, however. Draghi’s presentation contains a simple but fatal error – or should that be misrepresentation? As the note to the graphs indicates, the productivity measure is expressed in real terms. In other words, it shows how much more output an average worker produced in 2012 compared with 2000. So far so good. However, the wage measure that he uses, compensation per employee, is expressed in nominal terms (even if, interestingly, this is not expressly indicated on the slides). In other words, the productivity measure includes inflation, but the wage measure does not.

 

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Cyprus Salvaged After EU Deal Shuts Bank to Get $13B

By Rebecca Christie, James G. Neuger & Patrick Donahue – Mar 25, 2013 10:24 AM CT

Cyprus dodged a disorderly sovereign default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid.

Cypriot President Nicos Anastasiades agreed to shut the country’s second-largest bank under pressure from a German-led bloc in an overnight negotiating melodrama that threatened to rekindle the European debt crisis and rattle markets.

“It’s been yet another hard day’s night,” European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels early today. “There were no optimal solutions available, only hard choices.”

It was the second time in nine days that Cyprus struck a deal with its euro partners and the International Monetary Fund, capping a tumultuous week that underscored the contradictions of euro-crisis management that has dominated European policy making for more than three years. Cyprus, the euro area’s third- smallest economy, is the fifth country to tap international aid since the crisis broke out in Greece in 2009.

The first Cypriot accord, reached March 16, fell apart three days later when the parliament in Nicosia rejected a key plank, a tax on all bank accounts that sparked the indignation of smaller depositors. Efforts to win an alternative bailout from Russia, which loaned Cyprus 2.5 billion euros in 2011 when the nation was shut out of international markets, failed.

‘Playing Games’

“Nobody knows where we are heading,” said Epifanos Epifaniou, 50, who used to drive a delivery truck in Nicosia and has been unemployed for six months. “People are playing games with Cyprus. We are alone. Nobody is supporting us.”

The euro retreated 0.4 percent, trading at $1.2935 at 2:33 p.m. in Frankfurt, after initially rising as much as 0.5 percent. Stocks gained, with the Stoxx Europe 600 Index rising 0.5 percent. Italian 10-year bonds erased their decline since last month’s inconclusive election.

German Chancellor Angela Merkel lauded the agreement as lawmakers in her coalition embraced the package, which should go to a vote in Berlin in the coming weeks. The agreement goes a “long way” toward satisfying Germany’s Bundestag, Christian Democratic lawmaker Norbert Barthle said in an interview.

Bartering

The breakthrough came after Anastasiades bartered with officials including EU President Herman Van Rompuy, European Central Bank President Mario Draghi and IMF Managing Director Christine Lagarde. It was then sealed by the finance ministers, some of whom went out to dinner while the talks were ongoing.

With the ECB threatening to cut off emergency financing for tottering banks as soon as today, Cyprus’s leaders engineered another way of shrinking the island’s financial system.

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

Debt Doubts

The squeezed banking industry will likely lead to a “sharp drop” in Cyprus’s gross domestic product this year and next, according to Reinhard Cluse, a London-based economist at UBS AG. As a result, the euro group’s debt-to-GDP ratio target of 100 percent by 2020 “must be doubted,” he said.

The Cypriot Finance Ministry said in a January presentation that bailing out the country may push debt to a peak of about 140 percent of GDP next year.

“Cyprus’s sovereign debt problems will remain an issue of concern — for European policy makers and for the markets,” Cluse wrote in a note to clients today.

Banks in Cyprus, which have been shut for the past week, will remain closed until further notice. Lawmakers in Cyprus voted last week to impose capital controls to prevent a run on deposits when they reopen.

The union representing Cypriot banking workers said today the Mediterranean island is faced with a “painful compromise,” according to a statement posted on its website. It urged employees to be ready to return to work when banks reopen.

Better Solution

“This solution we reached tonight doesn’t have the downsides that the solution of last week did,” said Dutch Finance Minister Jeroen Dijsselbloem, chairman of the euro ministers’ panel. He said the deal was beyond the range of “political possibilities” a week ago.

The Cypriot parliament won’t have to vote again because it has already passed laws on bank restructuring, officials said. On the creditors’ side, legislatures in Germany, Finland and the Netherlands may hold votes to approve loans to Cyprus from the European Stability Mechanism, the 500 billion-euro rescue fund.

Klaus Regling, managing director of the rescue fund, said approval by creditor governments in mid-April will pave the way for the first payouts to Cyprus in early May.

Lagarde said she will recommend that the IMF provide loans, without giving a figure. “There might have been a bit of friction here and there,” she said of the talks.

Solvent Banks

The next step lies with the ECB, which needs to keep funds flowing to solvent Cypriot banks to enable them to open. While Draghi and Executive Board member Joerg Asmussen left Brussels without commenting to reporters, a statement by the ministers said the bank will channel liquidity to Bank of Cyprus “in line with applicable rules.”

The seizure of larger deposits may spark tensions with Russia, the source of an estimated $31 billion in holdings in Cypriot banks according to Moody’s Investors Service. A Cypriot mission to Moscow last week failed to yield an alternative to the European-sponsored bailout.

Still, Russian President Vladimir Putin ordered his government to discuss restructuring a 2011 loan to Cyprus, Russian news service RIA Novosti cited a spokesman as saying.

The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moody’s in a note early today. “Policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,” Moody’s said.

Nine Months

In a replay of tensions over aid for Greece at the outset of the crisis, European governments had wrangled over aid for Cyprus for nine months, exposing holes in the revamped economic management system that was built in three years of emergency policymaking, often at all-night summits.

A tightening of Europe’s budget-deficit restrictions and new rules to penalize countries with unbalanced economies or asset bubbles failed to stop the rot in Cyprus, which makes up less than 0.2 percent of euro-region output.

Hundreds of protesters massed outside the floodlit presidential palace in Nicosia late yesterday, one group brandishing a banner that said: “It’s capitalism, stupid.”

Source  Bloomberg

 

Related Articles

Protesters during an anti- bailout rally in Nicosia, Cyprus, on March 24, 2013. Photographer: Petros Karadjias/AP Photo

Lagarde Says Troika `Doing Fine' After Cyprus Deal

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March 25 (Bloomberg) — International Monetary Fund Managing Director Christine Lagarde says the so-called troika of the European Central Bank, European Commission and IMF is “doing fine” when asked by reporters about its future backing of bailouts. She spoke earlier today alongside Olli Rehn in Brussels following an emergency meeting of euro-area finance ministers, who agreed to a 10 billion-euro ($13 billion) bailout for Cyprus. (Source: Bloomberg)

March 22 (Bloomberg) — Bloomberg Television’s Ryan Chilcote reports on how the Russian population living and banking in Cyprus could be affected by the current crisis. He speaks from Limassol, Cyprus, on Bloomberg’s “The Pulse.” (Source: Bloomberg)

Getting Cash in Cyprus Is a Problem Amid Bailout

1:35

March 25 (Bloomberg) — As Cyprus dodges a disorderly default and unprecedented exit from the euro currency by winning a 10 billion-euro ($13 billion) bailout, Cypriots are finding cash hard to come by. Bloomberg Television’s Ryan Chilcote reports from Nicosia. (Source: Bloomberg)

Pissarides Sees `Disastrous' Implications in Cyprus

9:21

March 25 (Bloomberg) — Christopher Pissarides, the head of Cyprus’s economic policy council, talks about the island nation’s bailout package and the outlook for its future membership of the euro zone. He speaks from Nicosia with Guy Johnson and Francine Lacqua on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Cyprus Aid Package Seen to Set `Worrying' Precedent

6:36

March 25 (Bloomberg) — Stelios Platis, managing director of MAP S.Platis, talks about Cyprus’s deal with the European Union to shrink its banking system in exchange for a 10 billion-euro ($13 billion) bailout. He speaks from Cyprus on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

MP Says Cyprus Must Assess Benefits of Euro Exit

4:49

March 25 (Bloomberg) — Nicholas Papadopoulos, Cypriot lawmaker and chairman of the parliamentary finance committee, discusses the consequences of the nation’s 10 billion-euro ($13 billion) bailout. He speaks in Nicosia with Ryan Chilcote on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Europe Debt Crisis Needs `Pan-European' Solution

4:48

March 26 (Bloomberg) — Philippe D’Arvisenet, chief global economist at BNP Paribas SA, talks about Europe’s sovereign debt crisis and the outlook for the euro. Cyprus dodged a disorderly sovereign default and unprecedented exit from the euro by bowing to demands from creditors to shrink its banking system in exchange for 10 billion euros ($13 billion) of aid. D’Arvisenet speaks in Singapore with Haslinda Amin on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

Jeroen Dijsselbloem, the Netherlands’s finance minister and president of the Eurogroup, center, speaks as Christine Lagarde, managing director of the International Monetary Fund, left, and Olli Rehn, economic and monetary affairs commissioner for the European Union, listen during a news conference following the Eurogroup meeting in Brussels on March 25, 2013. Photographer: Jock Fistick/Bloomberg

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Photographer: Simon Dawson/Bloomberg

The revised accord spares bank accounts below the insured limit of 100,000 euros. It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl, the second biggest. Photographer: Simon Dawson/Bloomberg

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Risk of US double-dip recession rises: S&P

AFPAFP

The odds the United States will slip back into recession next year have risen, ratings agency Standard & Poor’s said, citing risks from the European debt crisis and budget tightening at year-end.

The US ratings firm raised the chance of the US falling into recession to 25 percent, up from a 20 percent chance estimated in February, as the world’s largest economy struggles to recover from a severe 2008-2009 slump.

It also pointed to the looming possibility of the government being forced by existing law to severely cut spending and increase taxes on January 1, the so-called fiscal cliff that would crunch the economy.

“Economic activity has downshifted sharply from earlier this year,” S&P said in a report on North American credit conditions amid global uncertainty, dated August 20.

“At the same time, possible contagion from the European debt crisis, the potential so-called ‘fiscal cliff’, and the risk of a hard landing for China’s economy have added greater uncertainty to US economic prospects,” it said.

In the second quarter, the world’s largest economy grew at a 1.5 percent annual rate, a sharp slowdown from late last year as unemployment remained stuck above 8.0 percent.

S&P underscored concern about the impact of a recession in the 17-nation eurozone, whose economy contracted 0.2 percent in the second quarter. S&P forecast a 0.6 percent contraction this year.

“A double-dip recession in Europe that transmits financial turmoil to the US could push it into recession,” the agency said.

However, S&P said its baseline scenario for the US economy — remained “modest growth,” projecting a gross domestic product expansion of about 2.1 percent for this year.

S&P also said it expected that politicians would agree before year-end to change the current severe budget cut and tax hike mandates to avoid the fiscal cliff fate.

However, it said, “We do not believe the US and European economies will improve substantially in the next year.”

Total Devastation: ‘Germany will pay for Euro break up’

 

Published on Jun 19, 2012 by

Well at the G20 itself world leaders have voiced their concern over the eurozone crisis, calling it the ‘single biggest threat to the world economy.’ Many have said progress has been way too slow in dealing with the situation. This comes after Sunday’s elections in Greece failed to produce an outright winner again to form a new government. The pro-bailout, New Democracy party, won almost 30% of the votes and is now urgently seeking to form a coalition. The new government will have a mammoth task ahead especially as the German Chancellor Angela Merkel said there will be no changes in the austerity cuts that are part of the Greek bailout. Professof of sociology from Binghamtom University James Petras believe even if a deal is reached between the parties, it’s unlikely they will find a solution for Greece.

Eurozone crisis: Banking sector could be ‘wiped out’ if weakest nations leave

Analysis by Credit Suisse estimates that up to 58% of the value of Europe’s banks could be wiped out by the departure of the ‘peripheral’ countries

Soup kitchen in Athens Greece

A soup kitchen in Athens, Greece. Photograph: John Kolesidis/Reuters

Few large eurozone banks would be left standing and the banking sector could face a €370bn (£298bn) lossif the euro crisis results in the single currency bloc breaking apart, according to one of the first indepth analyses of what might happen if the eurozone disintegrates.

The analysis by Credit Suisse estimates that up to 58% of the value of Europe‘s banks could be wiped out by the departure of the “peripheral” countries – Greece, Ireland, Italy, Portugal and Spain – from the eurozone.

Even if the single currency remains intact some €1.3tn of credit could be sucked out of the system as banks retrench to their home markets, unwinding years of financial integration, the Credit Suisse analysis warns. his represents as much as 10% of the credit in the financial system.

“We find that a Greek exit could be manageable … but in a peripheral exit, few of the large listed eurozone banks would be left standing,” the Credit Suisse report said.

The banking sector could need capital injections of as much as €470bn if the three scenarios considered by the Credit Suisse analysts – a Greek exit, an exit of the periphery countries and a situation where banks retrench domestically – happen at once.

The UK’s banks will not escape unscathed, although they are better insulated than those in the eurozone. In the event that the peripheral countries leave the eurozone, Barclays faces losses of €37bn and bailed out Royal Bank of Scotland some €26bn.

If only Greece were to leave the single currency, the Credit Suisse analysts calculate that losses for Europe’s banks would be limited to some 5% of the stock market value of banks across the eurozone with French banks and investment banks being hit hardest. Credit Agricole would be worst effected by a Greek exit.

The Credit Suisse analysts insist they are not expecting the euro area to break up – or for Greece to leave – but they believe it is likely there will be a dramatic reduction in cross-border business – leading to less loans for businesses and individuals. The International Monetary Fund has estimated that some €2tn of credit could be lost through a eurozone break up and the Credit Suisse analysts point out they have only analysed the impact on banks they research.

Ratings agency Fitch also estimated the impact of a Greek exit from the eurozone. While the direct impact would be minimal, Fitch warned that “the indirect impact of a Greek redenomination on banks throughout the eurozone could be severe”.

“A robust response from policymakers would be required to prevent contagion, and Fitch would expect a strong public statement of commitment by the European Central Bank and eurozone policymakers to provide support, if required,” Fitch said.

“Banks in Portugal and Ireland are more vulnerable to contagion risks as these nations could be perceived ‘next in line’ for a euro exit. If the EU policy response fails to control contagion risks and if bank runs and capital flight were to become a reality, banks in these countries would be under severe stress,” it said.

The Credit Suisse analysts said that banks have been preparing for a potential Greek exit so the impact would be limited, so long as “it is an orderly event”.

But if there is an exit of the five countries in the periphery the the consequences for the banks in those countries would be substantial”with some of them having their tangible equity largely wiped out”. Among those which would fall into this category are Intesa Sanpaolo in Italy.

 

 

 

Beijing on alert for possible Greek eurozone exit

  • Xinhua
An election poster for Greece's left-wing Syriza party. (File photo/CNS)An election poster for Greece’s left-wing Syriza party. (File photo/CNS)

China must take precautions against a possible exit by debt-ridden Greece from the eurozone, as an exit could cause turbulence in global financial markets and hurt exports and growth, government economists and analysts have warned.

Measures they have suggested to counter the crisis include adjusting asset holdings in the eurozone, boosting domestic demand, promoting structural reforms and hedging exchange losses, as well as maintaining a stable currency.

The world’s second-largest economy might see its year-on-year growth dip below 7% if Greece leaves the eurozone under current circumstances, according to Ba Shusong, an economist with the Development Research Center of the State Council, China’s cabinet. “That scenario and its impact on employment would be undesirable for the Chinese government,” Ba said.

His comments come ahead of national election polls conducted in Greece on Sunday, with global investors fearing that a left-wing coalition government will emerge from the election and tear down the bailout deals that have kept Greece afloat since 2010, leading to default and an exit from the eurozone.

Financial turbulence in Europe was a major driver in China’s economic downshift early this year, as it reduced external demand markedly, Ba said, adding that a Greek exit from the eurozone will make the situation worse.

He urged authorities to follow developments in Europe closely and adjust economic policies in line with the changes. China should reduce its holdings of assets in the eurozone’s peripheral countries if Greece moves toward an exit, Ba suggested.

To offset external impact with domestic demand, the government must continue to maintain investment growth, carry out structural tax reduction and boost the role of private capital, he added. There is a strong possibility that Greece will drop out of the eurozone in the future if economic turmoil continues in the region, although it is unlikely that it will happen immediately, Ba estimated.

The economist noted that if Greece stays in the eurozone, China’s exports will pick up after bottoming in the second quarter of 2012 and there should not be any massive fiscal stimulus like the 4-trillion-yuan (US$634 billion) investment plan rolled out in late 2008 to counter the global financial crisis.

Xiang Songzuo, deputy head of the International Monetary Institute at Renmin University of China in Beijing, said Greece is unlikely to withdraw from the eurozone at present and will return to talks with the EU, no matter which party gains power in the election.

Xiang said the government should take measures to maintain financial stability, especially the stability of the Chinese currency, adding that Beijing’s current policies to support growth are already the best response to the eurozone crisis.

China’s economy expanded at its slowest rate in nearly three years in the first quarter of 2012, growing 8.1% year on year, as the European sovereign debt crisis diminished export orders and a subdued property sector cooled investment.

Export and industrial output growth rebounded slightly in May from lower-than-expected levels in April, but fixed-asset investment and retail sales have continued to slow, according to official data. To buoy the slowing economy, China announced its first interest rate cut in more than three years last week. It has also fast-tracked some investment projects, opened the way for private capital to enter state-dominated industries and provided subsidies for purchases of energy-saving home appliances.

Economic troubles are likely to continue to plague Greece, which will weaken China’s exports gradually, said Yao Wei, China economist at Societe Generale. China’s monthly import and export growth will likely stay in the single digits from now until the third quarter, he forecast. However, Xiang said he believes there is no need to worry too much about the impact, as China’s major trading partner in the eurozone is Germany, whose economy remains resilient.

Exporters have been advised to prepare for fluctuations in the euro’s value against the Chinese yuan, which will incur greater risks of exchange losses.

The euro is expected to continue depreciating against the yuan in the near future and Chinese firms can use forward foreign exchange contracts and other financial derivatives to hedge exchange risks, said Ye Yaoting, a foreign exchange analyst with the Bank of Communications.

Companies should change euros into US dollars or yuan and receive future payments in non-euro currencies as much as possible, advised Wan Chao, an investment manager at Ping An Asset Management.

The EU is China’s largest trading partner. Its trade with China edged up 1.3% year on year in the first five months of 2012, compared to the 7.7% growth of the country’s total foreign trade.

Meanwhile, Chinese banks have been scaling back financial derivative trading with European banks to reduce exposure to risks. The Bank of China, the country’s third-largest lender, suspended purchases of derivatives, such as credit default swaps, from French banks Societe Generale and Credit Agricole at the end of 2011.

Industrial and Commercial Bank of China and Bank of Communications have also reduced investment product transactions with Societe General, Credit Agricole and French lender BNP Paribas, according to the banks’ reports.

Although China’s financial sector has very limited exposure to sovereign and bank asset risks in the eurozone, massive capital outflow from risky markets will affect China if Greece breaks away from the eurozone, Yu Yongding, a former central bank adviser, was reported as saying in late May.

China’s central bank and other departments should consider measures, including capital controls, capital market suspension and contingency fund injections, to counter the impact of a possible Greek withdrawal, Yu proposed.