Asia braces for crisis to hit despite EU, U.S. moves

By Alan Wheatley, China Economics Editor - Analysis

BEIJING (Reuters) - Even as hopes rise that Europe and the United States are finally getting to grips with the credit crisis, worries are growing in Asia that the region is ill-prepared for the financial storm heading its way.

Unlike the 1997/98 Asian crisis, the current meltdown does not have its epicenter in the region. Distress in local banking markets has not been as acute as in developed economies.

In contrast to a decade ago, Asian banks do not have a disastrous mismatch between short-term foreign-currency borrowings and long-term domestic-currency loans. And except for Australia and South Korea, banks' deposits dwarf their loans, so they are not dependent on wholesale money markets for funding.

Moreover, East Asia's collective current account surplus swelled to almost 7 percent of GDP last year from less than 3 percent in 2000, reducing its reliance on fickle capital inflows. Governments have built up vast holdings of currency reserves.

Indeed, an analysis by UBS shows Asia well down the list of emerging markets vulnerable to the 14-month-old global crisis.

And yet the timbers of Asia's financial house are beginning to creak.

In particular, analysts are nervously watching a widening in the spread between central banks' policy rates and how much commercial banks and firms have to pay to borrow money.

"There are some stresses in regional money and credit markets," said Michael Buchanan, Goldman Sachs's chief economist in Asia.

POOR COORDINATION

The risk is that banks will grow more reluctant to lend to Asian banks, no matter how strong their fundamentals, now that Australia, Britain and a clutch of European countries have either recapitalized their banks and/or guaranteed their new borrowing. The United States is working on a similar scheme.

"If it wasn't for the fact that every other banking sector around the world is going down this route, I don't think Asia would necessarily need to do the same," Buchanan said.

"But at some point, if every other bank has a government guarantee, then you're going to be at a bit of a disadvantage if you don't have a sovereign guarantee. So that issue might lead to some movement down the road," he said.

Which leads on to the next problem: regional coordination.

The whirlwind of the past weeks harshly exposed the European Union's lack of preparation for a cross-border banking crisis, despite a strong supranational institution in the form of the European Commission and decades of integration culminating in the creation of a single currency.

By contrast, Asia has done little more than pay lip service to financial cooperation. To be sure, central banks slung together an $80 billion web of swap lines to provide emergency liquidity after the 1997/98 crisis and there is a $2 billion Asian bond fund denominated in local currencies.