Europe Downgrade Poses Risks for Asian Economies

Wall Steet Journal

SYDNEY—Europe’s debt crisis poses a growing risk to credit ratings in the Asia-Pacific region, Standard & Poor’s Ratings Services said Monday, following the company’s series of downgrades to France and eight other euro-zone nations late last week. With Europe’s problems threatening to disrupt financial markets, governments in Asia may be helped by their strong balance sheets but would have more-limited options to deal with the global fallout compared with the response in 2008, the ratings firm said.

« It’s clear global risks have increased and it’s going to be a more challenging operating environment, even for the Asia-Pacific region, » said Ian Thompson, senior managing director and chief credit officer at S&P, in an interview Monday. « A dislocation in global funding markets also has the potential to damage credit in Asia-Pacific. »

Still, S&P is optimistic that China, the bulwark of growth in Asia, should avoid a hard landing following a period of monetary tightening. Slowing inflation in China and signs of softening growth have boosted speculation that Beijing could ease credit conditions by further lowering lenders’ reserve-requirement ratio.

« China is able to look after itself—it has a strong balance sheet and has the ability to support domestic consumption, » Mr. Thompson said.

Also Monday, International Monetary Fund First Deputy Managing Director David Lipton said the fund is planning to lower its global economic growth forecast for this year.

« The stakes are high, » Mr. Lipton said. « Without bold action, Europe could be swept into a downward spiral of collapsing confidence, stagnant growth and fewer jobs. »

No region would be immune from such a catastrophe, he said.

S&P late last week stripped France and Austria of their AAA status and downgraded several other euro-zone nations—renewing investor fears of a breakout of market turmoil similar to that which occurred during the global financial crisis.

Asian currencies on Monday were dragged lower as equities markets tumbled on the downgrade news, which emerged after Asian markets closed last week.

In an effort to deal with the crisis, the European Central Bank has pumped liquidity into the system, and central banks globally have opened up dollar swap lines to assist the flow of credit.

While the Asia-Pacific region would be helped by relatively strong economic growth—and strong balance sheets may provide a buffer against a Europe-led downturn—governments in Asia have diminished fiscal firepower needed to effectively stimulate their economies, said Mr. Thompson.

Korea, Japan and Singapore are among export-driven economies that have already seen demand hurt by Europe’s debt crisis. Australia’s economy is also vulnerable because the country’s mining boom is strongly pinned to Asian growth.

If export demand continues to wane and global credit markets deteriorate further, then sovereigns, companies and banks in Asia could feel the strain, Mr. Thompson said.

While Asian banks generally have strong deposit bases, lenders in Korea and Australia are at risk from any deterioration in funding conditions globally, he said. Australian banks, considered among the world’s safest, recently had to pay a hefty risk premium to investors when they issued covered bonds in Europe.

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