COLUMN - Petrodollar drought another blow to banks: James Saft

-- James Saft is a Reuters columnist. The opinions expressed are his own --

By James Saft

LONDON (Reuters) - Banks in Europe and Britain, and their unfortunate would-be borrowers, face another blow as plunging oil prices tighten the spigot of petrodollar deposits.

Billions of dollars worth of funds from oil exporting nations have made their way into banks from Zurich to London in recent years. These inflows helped banks withstand credit crisis losses and, given much of the money was in dollars, was a source of dollar liquidity during recent money market difficulties.

Petrodollars also arguably fed the lending boom while it lasted and cushioned the effects when the boom turned to bust. But, with oil having tumbled to around $55 per barrel from almost $150 this summer and the mid-$90s a year ago, flows into European banks will likely drop dramatically. What's more, a global recession and rolling financial crises mean that oil producers such as Russia and the Middle East states will have new calls to spend money at home, further diminishing the money available to grease the wheels of international banking.

Though it is impossible to track exactly, depositors from oil exporting states have long shown a preference for British and European banks over U.S. ones, some for political reasons, such as Venezuela, and some out of concern over the effects of post-September 11 U.S. banking disclosure laws.

This, needless to say, is not a good time for these banks to lose an important source of inflows. It will worsen their position and make it tougher for their clients to secure loans.

Borrowers in emerging Europe, such as in Hungary, may be particularly hard hit having gorged on credit during the boom.

Deposits abroad from oil producing countries hit more than $1.2 trillion (794 billion pounds) at the end of 2007, according to the Bank for International Settlements, up from less than half a trillion in the third quarter of 2003. More than $150 billion flowed into international accounts in 2007 alone, according to the BIS. Those flows will have continued to be strong in the first half of this year as oil soared, but would seem very likely to now be slowing and to diminish further so long as oil and the global economy struggle.