European banks continue exodus from Asia

The dire Eurozone debt crisis is forcing more European banks to withdraw massive investments from Asia.

Singapore’s DBS Bank Ltd, Southeast Asia’s largest bank by assets, said an amount more than the entire GDP of Vietnam fled Asia in the second half of 2011, and the retreat is continuing.

The European Commission said recently that cross-border steps are now necessary to prevent the Eurozone crisis from worsening. Many experts said a Lehman-styled credit crunch in Asia similar in extent to the 2008 global financial crisis is unlikely, however.

Compounding Asia’s woes is the grave situation facing Spain. The European Union has called bank deposit guarantees to calm investor fears that Spain will be unable to pay for the escalating cost of its US$800 billion public debt.

Although the exposure of Asian banks to Spanish banks remains quite low, the danger facing Asia has always been the interlinks within Europe and how Asia is exposed to that.

The concern among Asian banks is that European banks will run into a tightening liquidity and be forced to pull out of Asia as a whole.

The Bank for International Settlements said Euro 100 billion exited Asia in the last two quarters of 2011. This is half of what left in 2008.

European banks, many of which are global banks, provide funding to emerging markets, including Asia. Emerging markets, therefore, cannot be completely immune to what is an inevitable deleveraging of the European banking system.

While liquidity remains plentiful in Asia, there are signs of a credit crunch developing as investors dump the Euro while demand for the US dollar soars.