Foreign banks trimming exposure to emerging economies in 1998

Foreign banks trimming exposure to emerging economies in 1998

BASEL, Switzerland (AFP): Foreign banks trimmed their exposure to nearly all emerging economies in the second half of 1998 though the credit squeeze to Asian economies eased, the Bank for International Settlements said Sunday.

Hardly any region was spared from the flight to safety and liquidity following the Russian debt moratorium in August, the latest BIS report detailing end-1998 banking statistics said.

"However, contagion during this period was not as severe as these data suggests," said the BIS.

"Retrenchment from Asia was halved compared with the first half of 1998, confirming evidence from other sources of an easing of financing pressure in the region."

The credit pullback from Asia (excluding Japan) in the period totaled US$28 billion, leaving BIS reporting banks with $297.9 billion in outstanding credit to the region.

That is roughly $80 billion less than at the end of 1997, six months after the onset of the Asian financial crisis.

The eight billion dollar loan decline to South America in the last six months of 1998 was accounted for by Brazil (to which credits fell by $12 billion), and offset by new loans elsewhere on the continent, the BIS said.

International banks' fall in credits to Eastern Europe amounting to $17 billion reflected developments in Russia, whose debt moratorium sparked system-wide financial chaos.

While some African countries appear to have suffered from the general aversion to risk, banking business in the Middle East continued to thrive, the report said.

"These developments add weight to reports of a greater willingness among lenders to differentiate between emerging market borrowers and to provide financing at spreads deemed more commensurate with risks," the BIS said.

The main impact from the whittling down of credit to Asia was to further reduce the role of domestic banks in pumping foreign funds into the local economy, the BIS said.

Credits to Asian (excluding Japanese) banks out of total lending to Asian entities fell two percentage points to a low of 35 percent at year end, with a corresponding rise in lending to the non-bank private sector.

Loans to Thai banks, for example, fell to just 22 percent of all Thai borrowings, compared with 53 percent in South Korea.

The growing predominance of European banks showed no sign of abating, the BIS said.

Their combined share of emerging market debt rose even a the worst of the crisis hit global markets in the second part of 1998, the report said.

The largest rise was in Eastern Europe, where European banks held at 1998-year end 85 percent of outstanding foreign loans, up from 80 percent in the fist half.

While the default on Russian treasury bills had a strong impact on the positions reported by North American banks, the result was less marked for European banks.

This is because of the large percentage of officially supported long-term credits to Russia from German banks.

German banks' shares of Russian debt rose to 53 percent from 41 percent of the total foreign credits to the country in the period, "marking sizable valuation losses for other European banking groups," the BIS said.

Japanese banks' portfolio of Asian loans reached a 14-year low of 29 percent of total foreign credits to Asia, according to the BIS.