More generally, the Bank of International Settlements (BIS), in its latest quarterly review, reckons that European banks account for almost 30 percent of lending in Asia, and over half of all foreign lending there. According to Morgan Stanley, Europe could cut its lending to emerging markets by $500 billion should its leaders worst fears be realized, with obvious implications for development and growth in a range of Asia’s emerging-market economies.
Asia is therefore at greater risk from a second credit crunch than from a cooling down of export activity. “In many ways the financial crisis is extremely dangerous because it’s very unpredictable,” says Rajiv Biswas. “A financial crisis has transmission effects to the global financial market. It could be extremely devastating. The trade shocks could be substantial, but the financial shocks would be systemic; it could bring the world economy to the brink of collapse.” Following on from this scenario is the potential prospect of contagion, with the default of one Asian economy leading to panic, and the demise of others. Minsoo Lee identifies this as the most dangerous possible outcome, though he believes “the probability of this scenario is very limited.”
The reality is that while Asia certainly stands to lose a little from the eurozone crisis, it may ultimately stand to lose a very great deal. And this brings us back to the question of whether Asia should concern itself with Europe’s rescue. On the one hand, the economic danger to Asia is real; on the other hand, the political barriers to Asian economies offering themselves up as European life rafts remains considerable.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
China has already taken action, buying European bonds – this both helps fund Europe’s endangered economies, but it also inflates the value of the euro, which in turn helps to support Asian exports to the eurozone. Japan has also stepped in, acquiring 10 percent of the EFSF’s latest bond issue, though important developing economies, such as Brazil, India and Russia, declined to get involved. Should China, with its €3 trillion reserves, now do more? Beijing is reportedly weighing up the option of investing €100 billion in the EFSF, although Premier Wen Jiabao recently spelled out his government’s position that investment would only come in the wake of the implementation of credible reforms.
Despite its immense reserves, Biswas doesn’t believe that the onus for the rescue should rest with developing China. “It’s beyond the point where you can tell Europe to sort itself out,” he says. “But China can’t lead. It could take part in a G-20 response. You need the U.S. and Japan to be involved, for a G-3 response along with the EU. They can do a lot to intervene.” For Biswas, the bottom line is that “the [U.S.] Fed and Japan need to buy bonds”. Then the G-20, with the active involvement (in varying degrees) of its six Asia-Pacific members, needs to come in behind the U.S.-Japan-EU G3 because, Biswas adds, “financial markets want to see a coordinated global reaction.”
Asia’s response to the crisis could therefore be led by Japan, backed up by the region’s other G-20 members, including – but not only – China. And these, now, are the critical weeks, with Italy wavering close to the brink. The acceptance that Asian economies must play a role in Europe’s escapology is building. So too is the realization that the pain being felt in Europe could easily strike Asia too, unless the euro’s rot is stopped.