BIS warns of effects from Asia turmoil

Mon, 08 Dec 1997, 00:00 WIB | 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.