Banks continue retreat from South

by Chakravarthi Raghavan

Geneva 30 May -- International Banks continued to withdraw from the developing world throughout 1998, the latest consolidated banking statistics for end-1998 issued by the Bank of International Settlements shows.

This outcome was the result of the "flight to safety and liquidity" following the Russian debt moratorium of August 1998, BIS says.

The withdrawal from Asia amounted to $28 billion in the second half of 1998, claims on eastern Europe were trimmed by $17 billion and on Latin America by $8 billion.

But the retrenchment in Asia was half that in the first half of 1998, reflecting other evidence of easing of financial pressures on the region. In Latin America, there was a pull-back of $12 billion from Brazil, compensated by some increased lending to other Latin American economies. And the retreat from eastern Europe was essentially attributable to the Russian developments, while other major borrowers in the region were able to attract funds. African countries too suffered from the banks' risk aversion, but banking business continued to thrive in the Middle East.

BIS says that this confirms reports of a greater willingness among lenders to differentiate between emerging market borrowers and provide financing, albeit at spreads considered more commensurate with risks.

Overall, the claims of the BIS reporting area banks on the developing world stood at $705.9 billion at end 1998, compared to $726.8 billion in mid-1998 and $769.5 billion in end 1997.

Of the outstanding claims end-1998, some 52.8% was short-term for a period up to and including one year, while 39.3% was claims of over one year. There was thus a general decline in share of short-term credits (which stood at 54.6% in mid-1998 and 58% in end-1997).

This decline in share of short-term credits has been particularly pronounced in eastern Europe and Latin America. In eastern Europe this largely reflects losses in dollar value of exposures to Russia. In Latin America it has been due to non-renewal of credits by banks to Brazil.

Active policies of securing longer-term finance (by Argentina in Latin America and Hungary in eastern Europe) also led to a lengthening of the maturity profile.

Short-term claims on Asia also showed signs of stabilising at 52.5% compared to 53% in mid-1998 and 60.3% in end 1997. There was a reduction by four percentage points of short-term credit to Malaysia while that to China increased by two percentage points to 54 percent.

Some 29.4% of the claims were on banking sector, 16.2% on public sector and 54.3% on non-bank private sector. The sectoral composition shows that the main effect of withdrawal from Asian emerging markets has been to reduce the role of domestic banks in channelling international bank funds to local economies -- a two percentage point fall in the second half of 1998 to a low 35% at end-year, and a corresponding increase in the claims on the non- bank private sector.

Banks in South Korea and Thailand bore the brunt of this adjustment. In Thailand the weight of the local banking system in such exposure was cut to 22 percent compared to 53 percent in Latin America. The retreat from Brazil also had a similar result, a two percentage point reduction in claims on local banks, but an increase in the proportion held by the public sector. The new credits in Latin America to neighbouring countries also involved the public sector.

European banks continue to predominate, with their share of emerging market continuing to rise even as the worst financial crisis hit the global markets -- rising to 58.8 percent end-1998, compared to 57.5% in mid-1998 and 55.5% in end-1997. The largest increase in the weight of European banks was in relation to eastern Europe - from 80 to 85 percent.

The default on Russian treasury bills had a strong impact on positions of the North American banks, the large proportion of officially supported long-term credits in German banks' exposure to Russia alleviated the impact of the Russian decision on the combined book of the European lenders.

As a result, the share of German banks in total reported claims on Russia rose from 41 to 53 percent. This masked the sizeable valuation losses for other European banking groups.

The Japanese banks continued to lead the retrenchment from emerging economies in Asia - with their share reaching a 14-year low of 29 percent. The general retreat from Brazil was mitigated by more active lending by the US, German and Spanish banks to other major countries in the region. (SUNS4445)

The above article first appeared in the South-North Development Monitor (SUNS) of which Chakravarthi Raghavan is the Chief Editor.

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