Over the past couple of months, Europe has been at a crossroads. Ever since the fears among investors intensified in late 2010 regarding the financial stability of the southern European member countries, first and foremost Greece, European political leaders have implemented and applied a vast amount of tools to fend off the looming debt crisis. The current goal among Europe’s political elite is to prevent the debt crisis from spreading to bigger and too-big-too-bail-out economies in central and northern Europe and thereby to keep the Eurozone from breaking apart. These developments are closely watched by Europe’s economic partners, especially the US and Asia. Focusing on Asia in particular, the big question for Asian politicians, economists and market participants is now: how has or will the sovereign debt crisis in Europe affect Asia? Although the answer is everything but trivial, it is generally believed that Asia will most likely be affected in two ways: trade and finance.
The trade issue is relatively clear-cut. Asian economies, especially China, are closely connected to Europe. So far, the economic downturn in the Eurozone has had first impacts on the Asian economy, most prominently on India and China. However, it is believed that if the large Eurozone member countries, like Germany, France and Italy slide into a recession or dampen their economic growth through austerity programs, Asia’s industries – especially prominent exporters to Europe, like electronics producers or car manufacturers – will see an even steeper decline in their sales, further worsening the economic circumstances for Asia. Capital markets have already begun to fear this scenario, as stocks of Asian companies doing a lot of business in Europe suffered tremendously with every piece of negative news regarding Europe’s growing debt problem.
The second big issue is the Asian financial services industry and how it will be able to deal with the crisis. In Europe, the financial services industry is among the most severely affected industries by this crisis. For most European (and also US) banks, this is the second time in just a matter of 5 years they are hit with adverse economic conditions leaving them struggling for stability. As a consequence, many banks reacted to the crisis by cutting budgets and refocusing their core businesses, especially in Asia.
Over the past year it could be seen that many European and US banks strongly retreated from Asian markets by closing their offices or reducing staff in an effort to save costs. Most recently, French banks sold off loans made to Asian borrowers in the secondary market, a sure sign for the reduction in market exposure to Asia. This is good news for Asian banks: with western banks pulling out of Asia, Asian banks can use these opportunities to expand their business and grow. First signs of the strong surge of Asian banks could already be seen: in the first quarter of 2012, four of the top five providers of trade finance (by market share) for Asian companies were Asian banks. At the same time in 2011, only one of the top five banks was Asian. Additionally, Asian banks will most likely benefit from new bank-regulatory frameworks such as Basel III. The new capital requirements make it highly unattractive for European banks to provide trade finance (especially guarantees) and syndicated lending to Asian clients, further benefiting Asian banks. However, there are also some pitfalls Asian banks must look out for: in case of a continuing weakening of the Eurozone member states’ economies, the trade issue might come into play, potentially hurting Asian companies, which in turn can cause loan defaults or counterparty risks for Asian banks.
The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Asian Banking & Finance. The author was not remunerated for this article.
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Dr. Christian Rauch, Assistant Professor Finance, Goethe University Frankfurt, Germany, Department of Finance