Asia at risk from deleveraging of ECB

As the impact of Europe’s sovereign debt crisis worsens, there is a greater risk that the deleveraging of European banks may threaten volatile Asian markets, according to industry figures.

“The problem with Europe’s sovereign debt crisis is that it is pressuring European banks and other lenders to offload their assets to improve their solvency,” said Svein Andersen, secretary general of the Financial Stability Board.

“This also means that these European banks will be pulling back from other markets, including Asia, and this [will] be taking place for some period of time,” he added.

But policy makers stress that central banks in the region are better placed to handle the situation than in 2008 due their closer ties.

“Financial systems in Asia are better able to manage these high volatile capital inflows and outflows,” said Zeti Akhtar Aziz, the governor of Malaysia’s central bank.

“Our financial institutions are stronger, better capitalized and our financial markets are more developed,” he said. “We have more buffers in terms of our reserves at a much higher level, and therefore we can take them in our stride.”

The two high-profile figures were attending the first Asian consultative group meeting of the Financial Stability Board, which was held yesterday at the Shilla Hotel in central Seoul.

During the Group of 20 meeting in Seoul last year, the FSB said it would establish six regional consultative groups to include nonmember countries. At yesterday’s gathering, the first of the six, issues such as financial stability and vulnerabilities in the region were discussed as the euro zone debt crisis still looms large.

Last week, the global market saw a sharp sell-off as premiums on the credit default swaps of Spain and Italy hovered around 7 percent.

Considering the larger impact that Italy and Spain could have on the broader economy compared to Greece, there are growing expectations that the European Central Bank will act aggressively in shoring up borrowers. This could increase volatility in Asian markets as the bank still has huge investments in Asia.

By Lee Ho-jeong [ojlee82@joongang.co.kr]