By: Dr. Mike Campbell

According to the International Monetary fund (IMF), China is expected to return full-year growth figures of 8.2% for 2012. However, if the Eurozone is plunged into a sharp recession, the IMF cautions that growth could be slashed to 4.2%. A deep recession in the Eurozone would harm direct trade between the bloc and China, but it would also have a knock-on effect in other corners of the world which could, in turn, harm other bilateral trade with China.

It is key for Europe that a viable solution is found to the problem of Greek sovereign debt such that a disorderly default can be avoided. Discussions between Greece and her private lenders aim to get an agreement that investors will accept a 50% write-down on their investments. Part of the existing debt with short settlement dates would be swapped for longer term debt, but critically, the yield on the debt would be lower. Ratings agencies earlier stated that they would view any such move as a default (and you’d have to concede that they have a point), but they have been quiet recently.

Greece is also in hard negotiations with international lenders to allow it to access a further €130 billion bailout facility which was agreed, in principle, last year. Against the backdrop that Greece’s public debt spiked to 159% of GDP in Q3 2011 (up from 138.8% a year earlier), the ECB, IMF and EC are pushing for further austerity measures from Greece and strict implementation of what has already been agreed.

The IMF suggests that China could soften the blow of a further Eurozone recession by implementing tax cuts worth almost 3% of GDP and injecting billions of Dollars into its economy as it has the financial capacity to do so.