BIS warns of effects from Asia turmoil

Mon, 08 Dec 1997 | Source: REUTERS

ZURICH (Reuters): The Bank for International Settlements (BIS) said yesterday that the large number of banks exposed to Southeast Asia, especially Japanese banks, suggested broader potential repercussions from the region's currency turmoil.

BIS also said it was increasingly difficult for official aid to rescue creditors and debtors from poor investment decisions due to the growing role of private sector financing that flows from an ever larger number of sources.

"The large exposure of a number of banking groups in the region, Japanese banks in particular, suggests broader potential repercussions," BIS said in its quarterly report on international banking and financial market development.

BIS, a center for co-operation among the worlds' central banks, said Southeast Asia's currency turmoil had not fundamentally affected investors' appetite for risk and the issuance of international bonds and notes had again hit a record in the third quarter of 1997.

Strains in Southeast Asian countries were already apparent in 1995 and 1996 when the rise in the dollar lead to a significant appreciation in local currencies that were pegged to the dollar.

Another indicator of growing market stress was the sharp rise in the region's short-term external banking debt during 1995 and 1996, a rise that had been widely publicized in the case of Thailand, BIS said.

The structure of international lending to Southeast Asia in the 1990s has been markedly different from lending to Latin America and this explains why the repercussions could have a broader impact than Mexico's peso crisis.

Southeast Asian countries have mostly borrowed from banks to finance growth, but Latin America has raised money by issuing securities, such as bonds and notes.

Japanese banks have been the most aggressive lenders to Asia and at the end of 1996 these banks were owed US$118.6 billion from Asian borrowers, or 32 percent of the total outstanding claims by major international banks of $367.1 billion.

European banks, however, are also heavily exposed to Asia and were owed a total of $145.5 billion at the end of last year, or 40 percent of the total claims. German banks were the largest lenders followed by French and British banks, BIS data showed.

During the third quarter of 1997 the risk premiums on emerging market debt over U.S. Treasuries continued to narrow and new issues by Latin American borrowers were enough to offset declines in Asia and Eastern Europe.

New issues by emerging market borrowers remained at a near- record $37.8 billion compared with a total issue international debt of $164.1 billion in the third quarter.

Southeast Asia's crises had a larger impact on bank lending, where new international loans to Malaysia, Thailand and Taiwan dried up in the second quarter of 1997, BIS said.

BIS' figures cover lending by banks in the Group of 10 (G10) leading industrial nations, Hong Kong, Singapore and other European countries. G10 includes 11 countries: the U.S., Japan, Germany, Canada, Britain, France, Italy, the Netherlands, Belgium, Sweden and Switzerland.

The decline in lending to Malaysia, Thailand and Taiwan lead to a 30 percent decline in total international bank lending to Asia to $15 billion compared with total net international bank lending of $115 billion in the second quarter.

However, banking flows to Asia still remained high by historical standards and accounted for 50 percent of all lending from major international banks to emerging countries.

South Korea remained the largest debtor among emerging countries with outstanding loans of $116.8 billion at the end of June, ahead of Thailand's debt of $98.9 billion and Brazil's debt of $87.6 billion.

Banking flows to Latin America declined as new lending to Argentina, Chile and Mexico came to a standstill. Only Brazil saw a renewed increase in lending to $2.6 billion in the second quarter from $1.9 billion in the first quarter as the country took steps to preserve the incentives for capital imports to finance its growing account deficit.