Europe bank woes weighing on lending, economies around the world
- From: The Wall Street Journal
- November 22, 2011
Gail Kelly, chief executive of Westpac Bank. Source: The Australian
A PULLBACK in lending by European banks is beginning to be felt by companies in Africa, Australia and Latin America, making borrowing harder and more expensive, and putting pressure on slowing economies.
European banks in recent years dramatically boosted lending to emerging markets and were among the biggest cross-border lenders in these countries. Their retreat has tightened credit in industries -- from aircraft to media to mining -- squeezing economies already feeling the effects of reduced demand from the developed world for their exports.
The fear is what is a modest pullback in lending could morph into a repeat of the 2008 credit crunch that followed the collapse of Lehman Brothers. That cutback left businesses scrambling for cash and played a part in plunging world trade into its biggest slump since the Great Depression.
"We're in a very vulnerable position that's definitely impacting global growth," Gail Kelly, chief executive of Australia's Westpac Bank said at The Wall Street Journal CEO Council last week. "It's certainly impacting in my country and in Asia."
Italian lender UniCredit and German-based Commerzbank have both pledged recently to cut their lending activities outside their core home markets. In Asia and Australia, some French banks are on the sidelines after having been significant participants in syndicated loans, in which banks get together and lend large amounts of money.
"The main issue is the complete withdrawal from French banks in the market," said John Corrin, the Hong Kong-based head of loan syndications at Australia & New Zealand Banking Group. "They were reasonable-sized players accounting for 10 per cent of the Asia-Pacific market."
Last month, French lender BNP Paribas, one of the world's largest banks by assets, backed out on a commitment to provide as much as $300 million to a $1.95 billion syndicated loan for Australia's Seven West Media, leaving the rest of the syndicate, mostly Australian banks, to fill the gap.
A representative for BNP Paribas in Sydney said the decision was based on "capital-allocation requirements and other opportunities". The loan was expected to close on Friday but hasn't. Seven West Media didn't respond to a request to comment.
Pressure on the European banks to bolster their capital to offset losses on loans -- many of which are tied to ailing European governments -- is driving their cutback in lending. Some banks are selling assets and lending less, making loans harder to come by and costlier. That combination can reduce economic growth both at home and in far-off markets where they operate.
Because Europe has a large financial sector that does business all over the world, the eurozone's problems are having "bigger, disproportionate effects, particularly on emerging economies" Treasury Secretary Timothy Geithner said last week at the WSJ CEO Council.
Adding pressure to the loan market are efforts by some European banks to sell loans they hold on their books.
This effectively raises the supply of loans available for banks to invest in and has "negatively impacted" the willingness banks to participate in new loans to companies, said Mark Leahy, head of debt origination and fixed-income syndicate for Asia outside Japan at Nomura Securities in Singapore. That will eventually lead to higher borrowing costs, he said.
The US may also be feeling some effects from the European pullback. European banks' share of the syndicated loan market to US companies in the third quarter this year slipped to 20 per cent from 25 per cent in the year-earlier period, according to Dealogic.
Andrew Don, treasurer of National Rural Utilities Cooperative Finance Corp, said European banks declined to participate when the company borrowed $US835m in October, saying they felt they wouldn't get much other business from the company. In the past, European banks Crédit Agricole, Credit Suisse, Deutsche Bank, UBS and Rabobank had participated in the company's loans, according to Dealogic.
Capital concerns are largely spurring the European pullback, said Brad Hintz, banking analyst for Sanford Bernstein.
The European retreat has been a positive in easing competition for new business, said Christopher Gorman, president of Cleveland-based Key Corp bank and head of the bank's commercial lending.
In Brazil, Embraer, the world's fourth-largest aircraft maker, said some airlines are having trouble getting financing for aircraft.
"The capital markets are still very much closed to aircraft transactions," said Frederico Curado, Embraer's chief executive. "Credit is very selective, which is not necessarily bad, with the better airlines getting more favourable terms than those with lower credit ratings."
Deals are still being done via stepped-up lending from export credit agencies and leasing companies, he said.
In Nigeria, investment bank Africa Finance Corp is trying to keep alive two $US200m deals for oil projects after European banks backed away.
"There has been quite a bit of caution in European banks," said Osam Iyahen, vice president for oil and gas at AFC, which is partially owned by the Central Bank of Nigeria. "We'll have to find new capital to sort of bridge the gap until things settle down on the other side of the world."
Eurozone banks embarked a massive lending spree to emerging markets in recent years, seeking to diversify away from their sluggish home markets. From 2005 to the middle of 2011, lending by eurozone banks to emerging-markets countries increased four times to $US2.4 trillion, according to the Royal Bank of Canada and the Bank for International Settlements. The amount of overall lending slipped nearly 20 per cent after the Lehman crisis, but began recovering in 2010.
A similar drop would "cause significant economic and financial market dislocation and contraction", according to RBC.
The most exposed economies are in Eastern Europe. In the Czech Republic, for instance, eurozone banks have lent an amount valued at more than 105 per cent of that country's gross domestic product, according to BIS data crunched by RBC Capital Markets.
Latin America is the next market most exposed, with eurozone banks' loans to Chile equal to 40 per cent of its GDP, followed by 18 per cent of Mexico's GDP and 15 per cent of Brazil's. Asia is the least exposed. Eurozone loans to China represent just 2 per cent of its GDP, and loans to India, 4 per cent.
The head of the world's largest mining company, BHP Billiton, warned Thursday terms of trade finance have tightened for buyers of its iron ore, copper and other materials, adding to their caution.
Additional reporting: Robb M. Stewart, David Fickling, Vipal Monga and Matt Wirz
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