European banks claims on Asia has fallen some $119.5billion or 8.7% from the peak, to $1,263billion at end-2011, according to BofA Merrill Lynch report.
BofA Merrill Lynch in its Global Economic Weekly, said that largest absolute falls were seen from French banks ($55billion), followed by the British ($29.3billion), Swiss ($10.1billion) and German banks ($9.5billion). Percentage declines were disproportionately led by the French banks (33.3%), followed bythe Swiss (9.3%), German (7.7%) and British banks (3.4%). Within Asia, Singapore and Hong Kong – the two largest financial centers – have had the largest percentage drop in European bank claims. For percentage change in European bank claims (as share of country’s GDP) from the peak, Singapore (6.2%) and Hong Kong (6.1%) had the largest declines, followed by Taiwan (4.6%), Korea (2.9%), Malaysia (1%) and India (0.8%). Indonesia and China had the smallest drop (0.2%)
So far, the report said, deleveraging from European banks has been partly buffeted and offset by Japanese and other Asian banks, with therefore limited impact on credit or economic growth. Asia’s larger market shares in trade financing are especially evident, a segment where Spanish and French banks dominate. The fear is that in the event of a Greek exit, the pace of deleveraging would accelerate.
The IMF warns, in its latest Global Financial Stability report, that deleveraging is likely to continue and broaden, with European banks reducing some $2trillion in assets over the next two years. There are already some signs that US dollar-to-loan ratios of some Asian banks are already at elevated levels and far above 100%. That will be a constraint on how fast Asian banks can expand and compensate the deleveraging from Europe’s banks. Asian banks are also generally smaller than European banks and may be constrained by counterparty limits.
The feared fallout from a Greek euro exit continues to sway markets. As media reports mounted that European policymakers are planning for contingencies of a Greek exit, investors sent the euro to its lowest level since mid-2010. Plunging EM FX confirms the dollar-strength story.
Oil prices extended the rout, but global stocks moved sideways. Long bond yields in Spain and Italy also stayed largely put, but German Bunds rose as investors snapped up German zero-coupon two-year bonds at a ludicrously low discount. The economic data also weighed on the risk-off side. Preliminary PMIs fell both in the euro area (46.7 to 45.9) and in China (49.3 to 48.7). Likewise, the German IFO business climate indicator dropped for the first time in seven months, to 106.9 in May from 109.9. In the US, this week’s housing data struck a positive tone but the durables goods report surprised on the downside and pointed to a soft start to 2Q on the capex front. In Asia, Taiwan export orders came in below expectations. Soft data are egging policymakers on. In China, Premier Wen strengthened the growth bias of policy guidelines. In the UK, this week’s MPC minutes suggest the BoE is edging closer to QE. The central bank pointed out that it sees “no meaningful way of quantifying the size and likelihood of the most extreme possibilities associated with developments in the euro area”. In Japan, the BoJ left the policy framework unchanged but we expect additional easing in 2H 201.