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Greek exit to reduce Asian access to trade finance

07 Jun 2012

Asian manufacturers would be exposed to a Greek exit from the eurozone via weaker export demand and reduced access to trade finance, says Moody’s.

Eurozone’s deepening debt crisis is anticipated to negatively impact Asian manufacturers as demand dips and access to trade finance tightens.

A financial incident in Europe is expected to affect Asian economies through three main channels: financial and credit markets, export demand and foreign investment, according to a report from Moody’s on June 6.

As a result, a disorderly Greek exit would exacerbate current credit conditions, which have tightened extensively over the past few months as European banks deleverage from Asia. Trade finance, the lifeblood of an exporter, is going to be affected.

“Tighter global credit conditions affect Asian economies chiefly through trade financing, which was a large factor in the 2008-09 downturn in Asian manufacturing,” said Fred Gibson, associate economist at Moody’s Analytics in the report. “Asian producers rely on European banks for export financing and would struggle under a scenario of European financial stress.”

Exporters tend to ship orders before receiving payment, but to protect against risk of buyers defaulting, exporters get working capital loans, credit lines, a credit guarantee from the importer’s bank, or a prepayment at a discount of the original amount.

This is now going to be increasingly challenging, especially as the agency predicts a Greece exit would be highly disorderly.

The second channel – demand – is also expected to decline which would crimp business confidence and hurt manufacturers in the region. In addition to negatively impacting Asian financial markets, this outcome will weigh on business investment, employment and household spending abroad, says Moody’s.

“A disorderly Greek exit would lower economic activity and import demand in Europe and elsewhere,” added Gibson. “Asian manufacturers are still largely export-driven, so this is the main demand channel that we are interested in.”

Lastly, portfolio flows in Asia would likely slow and possibly reverse as investors pulled back from riskier Asian assets, notes Moody’s. Foreign investment into the region would also fall as international firms reduce expansion plans.

While all of these factors brought about by the disorderly default in Greece may be worrying, the rating agency believes that this will not be as severe as the 2008 financial crisis.

“Asian firms and policymakers are better positioned heading into any new crisis,” said Gibson. “The trade financing channel appears less important.”

“Following the 2008-2009 credit squeeze, Asian central banks increased swap lines, while Asian companies sought alternative sources of finance and supply arrangements to better cope with any future credit problems,” he added. “This effect, at least, should be mitigated.”

However, a muted policy response – in the example of China which is unlikely to match the large-scale fiscal and monetary response seen in 2008 – leaves Asian manufacturers with a longer road back to full production, adds Moody’s.

07 Jun 2012