Asian borrowers squeezed by foreign pullback

Tue Jan 31, 2012 9:59am GMT

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Wayne Arnold

HONG KONG, Jan 30(Reuters Breakingviews) - Asian borrowers are feeling the pinch. European, British and U.S. banks all cut credit to the region in the third quarter, helping pull $87 billion from the region. That left Asian corporate borrowing costs at their highest since mid-2009. And Asia might not be able to count on another influx of cheap U.S. dollars, as it did then, to reverse risk aversion.

European banks cut credit to Asia by three percent, or $55.7 billion, according to data from the Bank for International Settlements, to about $2.14 trillion. That may seem trifling. After all, it resulted in a mere 2.1 percent decline in overall foreign lending to Asia.

The problem is that foreign banks dominate short-term dollar lending when as much as 46 percent of Asia’s foreign loans are of two-year maturities or less. And Asian growth has in recent years become increasingly dependent on expanding credit, particularly in China, Singapore and South Korea, where foreign lending shrank by 11 percent.

Asian companies are seeing the effects up close. Foreigners sold $19.7 billion in Asian stocks in the third quarter, helping drive the MSCI’s Asia ex-Japan index down 23 percent. That makes it harder to sell new shares. And corporate borrowing costs are back up where they were in mid-2009 for all but the bluest blue-chips. Korea's Hana Bank 2017 bonds, for example, now yield 7.3 percent, up from 3.2 percent six months ago.

Asia’s own banks tried to fill the void: loans from Taiwan climbed seven percent and from Japan by five percent. But a $30.2 billion in cuts by both British and U.S. banks meant that their efforts fell short.

The worst case for Asia's borrowers might be that Europe worsens, while the United States muddles through. At present, the U.S. economy neither looks strong enough to revive Asian exports, nor weak enough to prompt the Federal Reserve into expanding credit. That means Western lenders will probably keep their distance, and their Eastern clients will have to pay up, or go without.

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CONTEXT NEWS

-- The Bank for International Settlements said on Jan. 27 that cross-border loans from banks reporting to it rebounded two percent over the third quarter of 2011 after falling 0.6 percent in the three months ending June 30. The recovery was led by a interbank lending, which rose 4.2 percent as lending to non-banks fell 1.8 percent.

-- Most of the increased lending was to developed countries, the BIS said, while lending to developing countries fell by $10 billion, led by a decline in lending to Poland, Hungary, Turkey and South Korea.

-- BIS statistical commentary:

here

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(Editing by John Foley and David Evans)

((wayne.arnold@thomsonreuters.com)) Keywords: BREAKINGVIEWS ASIA/BANKS

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