As self-imposed austerity measures drive the Euro Zone back into recession, economies across the world worry about less available credit from European banks. As the Euro Zone increases its lending limit again the EU is focusing on keeping its own economies afloat. However, the big Euro Zone banks have traditionally had customers all across the world. Clients in Asia, especially, are concerned that a Euro Zone recession will reduce the European demand for Asian exports. A faltering economy in the Euro Zone will further reduce balance sheets and result in less available credit from European banks. Although the combined efforts of the IMF, European Central Bank, and leaders of the EU helped avoid a Greek financial collapse , Spain is now teetering on the brink of disaster and the continent’s third largest economy, Italy, is none too healthy. If worse comes to worst any more low interest rate loans from the European Central Bank to ailing European banks may well come with the stipulation that the money be lent at home and not abroad.
Turning Off Credit to Asia
Will less available credit from European Banks really damage the economies in Asia? After all Japan, Taiwan, and mainland China have large foreign currency reserves. But, there is no clear indication that the national treasuries of these and other Asian nations would open their doors, so to speak, and let borrowers walk right in. When the recession and banking crisis hit in 2008 the effects were devastating to a large number of borrowers across Asia and the Pacific. The large European banks that do business across the world have relationships with their clients and are set up to efficiently lend in time of need. If this source of funds is cut off Asian borrowers might find that they have to pay a political price China comes to the rescue with loans. That is to say less available credit from European banks could upset the balance of influence and power across Asia and the Pacific. Profitable investing in Asia might become more difficult as Chinese influence increases and transparency decreases. Add the risk of a Chinese real estate crash, decreased Asian exports to Europe, and higher oil prices based on Middle East tension and you have a recipe for potential disaster for the combined economies of the Far East.
Long Term Effects of Shutting off Western Credit to Asia
World trade will fall off measurably Europe buys less from Asia. It will also fall off if Asian producers, at least of now, find less available credit from European banks. However, if European banks cease to be major players in Asia, local banks will pick up the slack. This could result in stronger trade among the nations of Asia and less reliance of trade with the West. That would, in fact, be a healthy thing for China, Japan, Taiwan, Australia, and the rest. Many credit (or blame) the tightening of credit after 2008 for the fact that China is attempting to internationalize its currency, the Yuan. If China succeeds in converting the Yuan into a reserve currency the roles of Europe and North America in the affairs of Asia could well lessen. However, since banks are in business to make money it is unlikely that European or North American banks will retreat from business in Asia. It will take more than a weak Chinese manufacturing report or questionable real estate market to keep Western banks from investing in the promise of long term Asian growth.