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.

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Does the Inter-American Development Bank need to increase its lending base?

Press reports and TV out of Colombia this last week noted that a major point of discussion at the Inter-American Development Bank meeting in Medellin, Colombia is whether or not the Inter-American Development Bank 48 nation membership needs to fund the Inter-American Development Bank with more capital.

As anyone watching the news is aware nations throughout the world are pumping money into their banks and economies in general in order to keep businesses going and their people employed. However, poorer countries and regional economies are not able to do this and run the risk in these difficult economic times of severe unemployment and loss of the infrastructure provided by successful businesses.

The Inter-American Development Bank is a primary and last resort source of funding and credit in Latin America. The Inter-American Development Bank was founded after the Second World War at the request of the Organization of American States. Its roll has been to provide funding and credit for infrastructure improvements and social needs for individual nations and regional economies. In these difficult times the Inter-American Development Bank and others often provide the only source of substantial outside revenue for some Latin American companies.

The answer to the question is that the Inter-American Development Bank probably needs to ask its wealthier members to pay more so that commerce and social stability will continue until the recession starts to wane.

Long Term Investment and Inter-American Development Bank Issues

We have talked before about the fact that those with cash reserves, those selling basic necessities, and those with high cost of entry businesses are likely to do reasonable well during the recession. Those with sufficient credit to weather the storm should be included in this group. In parts of each economy only a few businesses may survive in their current form and with their current ownership. Here is where knowledge of the businesses throughout Latin America, for example, comes into play. Here is where familiarity of the sources of credit such as the Inter-American Development Bank comes into play.

Whether it is mining in the Andes or natural gas extraction in Ecuador these companies need funding which often is through local banks backed up with credit by international lending institutions in these times. A little research into who has funding for development projects and whose banks are getting reserve collateral from the likes of the Inter-American Development Bank will allow the long term investor to put his or her money in companies or regional economies that will likely survive the recession. Those who survive will then have the opportunity to expand into economic niches left by those companies that failed.

It is a temptation to only look at local and national news these days but there is and will be action elsewhere. The Internet may be a better source than the national news. Take a look at the Inter-American Development Bank web site, click the English option unless you speak Spanish, French (French Guiana), or Portuguese (Brazil) and do a little reading.