MANILA - Standard & Poor's warned Thursday a further slowdown in the global economy and another knock to market confidence could hasten deleveraging among European banks, a development that could have a significant impact on Asian financial markets.
S&P's managing director for financial institutions ratings in Asia-Pacific, Ritesh Maheshwari, said in a preview of a presentation scheduled for Friday at the annual meeting of the Asian Development Bank in Manila that while the pace of asset reduction by European banks has moderated recently due to the refinancing operations of the European Central Bank, deleveraging will remain a common theme for euro-zone lenders.
European banks will continue to turn to asset sales because of higher capital requirements--especially with the impending implementation of Basel III, a weak economic operating environment and limited capacity to raise equity in the capital markets, he said.
"Risk events are still taking place...there is more pain to come. We've not seen the bottom," said Maheshwari, when asked for his view on whether the worst is over for Europe.
He said deleveraging could accelerate among European banks if sovereign creditworthiness in the euro zone weakens, the global economy enters another recession, funding is constrained, or if there is a shift in governments' support for banks. The outlook on the credit ratings of 14 of the 17 euro-zone countries are negative, he noted.
European banks have the largest presence among foreign banks in the Asia-Pacific region, with total exposure of $841 billion at the end of 2011, equivalent to 4.3% of the region's total gross domestic product, S&P said, citing Bank for International Settlement data.
Maheshwari said the ability of Asia-Pacific banks to fill the void created by the deleveraging will depend on the speed and magnitude of the asset sales by the European lenders. He said a more orderly deleveraging would allow Asia-Pacific banks to acquire the expertise and funds needed to take over the role of European banks in providing trade, infrastructure and other specialized financing.
