An Umbrella On A Sunny Day?
Western banks are reducing their overseas loans according to the Financial Times today. This comes as no surprise - it had been happening already, so quite why did they go into print today? Simple - the Bank for International Settlements published the "official" figures which showed that some USD4.8billion has been removed from the cross-border market.What this means, though, is that recovery will slow down even more. Banks, whether you love 'em or hate 'em, provide the financial grease that every economy needs to grow. They provide companies with overdrafts, loans and trade finance facilities. All these go towards enabling companies to pay their employees to manufacture goods or deliver services and receive payment from consumers later. Their staff then spend their salaries (after tax) on other goods and services in their country which in turn pay others' salaries and so on. In other words, you create a "virtuous circle" of economic activity.
Remove the finance, and you remove the employees' ability to receive a salary and therefore to keep that virtuous circle going. Someone has to step in, and this time it will have to be governments, the IMF or the World Bank. At the last G20 meeting, additional funding was pledged to shore up the IMF and to provide trade finance. We now need this funding in place and to be disbursed pronto!
Economies most likely to suffer will be the emerging ones, where financing is coming up for rollover at this time as well (just to add to the problem).
So where does this leave us? Short-term, replacement finance needs to be put in place - IMF to the rescue? Secondly, the governments of those countries which have relied on cross-border finance will need to review their strategies and assess how to attract and retain this finance. With developments at the global level, it is possible that banks may be required to hold additional capital in their overseas locations, rather than in one "pot" centrally to be disbursed as they see fit. This will not appeal to banks and will probably result in pricing changing to reflect the additional cost of holding capital in certain countries, but will discourage withdrawals of the sort we have seen.
We are going through difficult economic times, but by withdrawing support to other countries, banks again risk being accused of being the "fair weather friends" that so many see them as. They need friends right now...
Labels: Financial
posted by William Martin @ 16:49
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