By Wayne Arnold
Relax, the stress tests are over and 90% of Europe's banks
passed. That's supposed to help restore confidence in the
Continent's financial system and, by extension, its economy.
Tests by the European Central Bank and the European Banking
Authority concluded that only 13 of 130 European banks need to
shore up their capital levels.
Anyone who thinks this doesn't have any bearing on Asia has been
living under a rock the past few years and missed the way Europe's
semi-annual convulsions tend to sweep up Asia's financial markets.
Paradoxically, the latest relief over European banks may prove a
headwind for Asian stocks and a positive for the region's
bonds.
We can now rest assured that as Europe's economy lurches to a
halt, it's unlikely to suck Europe's financial system down with it.
That's cold comfort, perhaps. It doesn't break the vicious cycle of
slowing growth and anemic lending that is pulling Europe's economy
into a deflationary pirouette. Banks may survive slowing growth,
but they're still unlikely to throw perfectly good credit at a
sinking economy -- yet the economy is unlikely to stop sinking
until they do.
As Europe slips further and further into an economic coma, the
rather impressive recovery in Asia's exports to the EU over the
past year seems certain to succumb. In the third quarter, exports
from China, Japan and South Korea to Europe climbed almost 11% from
levels a year ago to a record high, led by a 15% jump in shipments
from China.
And the cost of pulling those 13 slacker banks back into line,
whether through rights issues or consolidation, is going to pull at
least 9.5 billion Euros ($12 billion) out of capital markets. Most
of that will naturally come from European pockets, but some will
probably drain from Asia as investors from Europe and beyond answer
the call to make banks whole.
Combine that with the dimming outlook for Europe's economy and
the implications of an improving U.S. economy -- complete with
interest-rate hike by the U.S. Federal Reserve -- and you're left
with a tangy bouillabaisse of reasons for investors to pull more
funds out of Asia's stock markets. In the past month, foreign
investors have sold off $14.6 billion of the $32.6 billion in Asian
stocks they bought this year.
The health of Europe's banks relative to the plight of their
economy, however, seems likely to boost their appetite for
higher-yielding, higher-quality assets in Asia to offset the
odoriferous platter of soft cheeses now stinking up their balance
sheets.
Lending by European banks to borrowers in Asia climbed roughly
6.4% in the second quarter to $2.2 trillion, led by a surge in
lending to China, Hong Kong and Japan, according to the Bank for
International Settlements. Much of that lending came from British
banks, which includes two Asian banks headquartered in London, HSBC
and Standard Chartered. Aside from the British, lending from the
Continent is also booming. Credit from French banks to developing
Asia rose 42% to $161 billion, with loans to Chinese borrowers
climbing 53% to $57 billion.
Credit from Europe could be helped, too, if the ECB expands its
own version of quantitative easing. Money-printing by the Fed sent
waves of cheap dollars into Asia's faster-growing economies. That
program is about to end and the ECB is unlikely to match it in
scale. But some are betting the ECB will eventually overcome German
reticence to buying government bonds, in which case more Euros are
likely to spill into Asia's credit markets.
That's obviously good news for Asian bond holders and borrowers,
as it will push the value of bonds up and borrowing costs down.
Morgan Stanley says sovereign bonds are the most likely
beneficiaries. Foreign ownership of Indonesian government bonds
climbed 52% in the past year. Foreigners recently owned 37% of the
government's tradable debt, up from 31% a year ago.
A renewed surge of European credit may prove especially helpful
to China's increasingly cash-strapped property developers, who have
led a rush to borrow offshore as domestic credit lines dry up.
China's foreign bank loans climbed by a third in the second quarter
to a record $813 billion.
But the prospects of more easy foreign credit may not be such a
healthy thing for a region already developing a worrisome
dependence on debt to maintain growth. According to HSBC, debt in
Asia -- excluding Japan -- has climbed to more than 110% of its
combined GDP, up from about 80% as recently as 2007.
So while the health of Europe's banks may be a source of
short-term gain for Asia, until they help revive European growth,
they may simply end up pouring more cognac on Asia's financial
flambé.
Comments? E-mail us at wayne.arnold@barrons.com
Comments? E-mail us at asiaeditors@barrons.com
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