Europe woes won’t stall trade finance in Asia

By V. Phani Kumar, MarketWatch
HONG KONG(MarketWatch) — Lessons from the global financial crisis and relatively stronger U.S. banks will likely protect Asian businesses from a repeat of the 2008 horror show, even as European debt troubles make trade loans more expensive and difficult to access.
A full-blown euro-zone crisis could still hit demand for Asian products and services harder than it has so far. But unlike the turmoil they faced in the aftermath of Lehman Brothers’ collapse, the region’s exporters are unlikely to suffocate this time around, gasping for credit like fish out of water, say bankers and analysts.
“The importance of trade finance to the global economy is better understood now than in 2008,” said Mark Williams, chief economist for Asia at Capital Economics. “One of the factors that contributed to the recovery in 2009 was the $250 billion of trade-finance guarantees announced by the [Group of 20 major economies]. In the event of a second global financial crisis, future guarantees are likely to be forthcoming.”

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Trade finance is often compared to the oil that greases the moving parts of a machine. A simple and frequently used form of trade finance is a letter of credit, which is provided by an importer’s bank to pay for goods shipped by an exporter. As the U.S. dollar is the currency of transaction in most cases, trade is affected whenever there is a scarcity of dollars.
According to Dealogic figures, several European banks have consistently ranked among the top 30 providers of trade finance in the Asia-Pacific region, excluding Japan, between 2007 and 2011.
BBVA S.A.

, which has a major presence in Spain and Latin American markets, was the largest provider of such loans in 4 of the last 5 years. BBVA lost the top spot to China Development Bank Corp. only in 2009, when mainland Chinese banks opened their lending taps to fashion a recovery from the financial crisis.
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European banks’ exposure to trade finance in Asia is disproportionately large to their overall loans in the region.
But Capital Economics’ Williams cited the latest data from Bank of International Settlements as showing that euro-zone banks account for only 2.3% of total credit in emerging Asia. That is meager compared to their 47.3% share of lending in emerging Europe and 17.1% in Latin America.
One consequence of the ongoing sovereign-debt crisis in Europe is that it has effectively shut out several major European banks from U.S. money markets. Many of the European lenders that have historically been the big providers of trade finance in Asia are now scaling back their dollar-loan books.

Increased funding costs

That is in turn forcing an increase in the interest rates banks charge on trade finance.

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“The reality is spreads have gone up fairly significantly — almost to the 2008 peak levels — over the last six weeks. I think that, in general, there will be some tapering off, but the higher spreads are here to stay,” said Ravi Saxena, managing director and Asia trade head at Citibank

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Saxena said that in the past, exporters could easily convert a letter of credit into money on presentation at a bank. But a scarcity of dollars is making that more difficult.
Edward George, a London-based soft-commodities specialist at Africa-focused Ecobank, said the cost of trade finance has risen by as much as 5 percentage points in some cases over the past year.
“Short-term trade finance has been the worst affected, whereas project finance is mostly protected by long-term agreements,” said George.
The impact is being felt, even after the U.S. Federal Reserve agreed late last year to lower the interest rates on currency swaps with five other major central banks from around the world.
Under such swaps, the Fed provides dollar liquidity to its counterparts, including the European Central Bank and the Bank of Japan. Those central banks can then inject dollars into their respective jurisdictions, when required.
Read full story on the currency swaps.

Dollar hoarding

The situation is aggravated by hoarding of U.S. dollars, even when they are available.
“Demand for U.S. dollars remains high, but the supply has dried up, and many banks are hoarding U.S. dollars for their preferred clients,” said George.

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