Cash rich, dollar poor
The retreat of European banks from Asia could create a $390 billion hole that drives up borrowing costs and crimps growth. Asia’s companies are used to a world where dollars were cheap and abundant. The region’s banks are flush with local currency deposits, but have to borrow most of their dollars. So as Western banks pull back, Asian lenders may find it difficult to fill the gap.
It’s not known yet how much Western banks are pulling out of the region. As recently as June 30, their credit into Asia – outside Japan – was still rising, to a record $1.45 trillion. But Japan’s troubled banks cut a quarter of their credit to Southeast Asia between mid-1995 and the start of the Asian financial crisis in mid-1997. It has yet to recover. If European banks did pull out in the same proportion, it would carve roughly $390 billion out of the credit landscape.
European lenders only account for 2.3 percent of loans to non-banks in emerging Asia, according to the BIS. But they are big lenders to Asian banks. Led by Spain’s BBVA, and France’s BNP Paribas, Credit Agricole and Societe Generale, they account for 32 percent of Asia’s syndicated lending, according to Citigroup, and 40 percent of syndicated trade finance. Europe thus accounts for 61 percent of foreign loans to non-Japanese Asia, most of it in short, one- to two-year loans.
The reason is that at least two-thirds of global trade and investment is still conducted in dollars. European banks were raising cheap dollars in the U.S. Aside from HSBC and Standard Chartered, most Asian banks don’t. What they lack in dollar deposits they have to borrow from Western banks. So while their total loan-to-deposit ratios may suggest they can take up their slack, their dollar loans exceed dollar deposits many times over, exposing them to currency fluctuations.
As Western credit recedes, it raises the price of dollars and with it the cost of funding beyond dollar lending. The average cost of borrowing in Asia has already risen by 50 percent since June. And until either Europe rights itself or Asia finds an alternative source of dollars, higher funding costs could join slowing exports as another brake on the region’s growth.