* Euro zone crisis ripples far and wide
* Asia fears reprise of post-Lehman banking drought
* Eastern Europe in firing line due to close EU links
* ECB's cheap loans buy time for banks, emerging markets
By Alan Wheatley, Global Economics Correspondent
LONDON, April 30 (Reuters)- From Beijing to Bucharest,
emerging market policymakers are as worried as those in Brussels
that the rapid contraction in western European banks' balance
sheets will compound the debt crisis and further delay economic
In a striking indication of that concern, the International
Monetary Fund said developments in the euro area pose a greater
risk to the Asia-Pacific region than either a hard landing in
China or a rise in commodity prices.
"An escalation of the crisis with a disorderly, large-scale,
and aggressive trimming of balance sheets could have a serious
impact on Asia," the IMF said in a report released on Friday.
Memories in the region are fresh of how quickly banks drew
in their horns after the collapse of Lehman Brothers in
September 2008. From peak to trough, the foreign claims of euro
area and British lenders fell by around 37 percent and 21
percent of outstanding claims, respectively, the IMF estimates.
World trade shrank by 30 percent. Asian economies slowed to
a crawl, prompting China to start transforming the yuan into an
international currency to reduce its reliance on fickle dollar
"If European Union bank deleveraging accelerates and even
prompts banks from other regions to cut back, this will amount
to a real pinch for Asia," HSBC economist Frederic Neumann in
Hong Kong said in a note to clients.
"A pinch, of course, is not tantamount to a systemic
collapse, but it is uncomfortable nonetheless."
Figures from the Bank for International Settlements (BIS)
show why Asia is nervous.
In the fourth quarter of last year, the consolidated claims
of European and UK banks on Asia including Japan fell by $105
billion, or 5.9 percent, after a 2.9 percent drop in the
preceding three months. Overall cross-border lending to Chinese
banks fell for the first time in 10 quarters.
The result of the pullback was an acute shortage of dollars
in Asia that caused interbank rates to rise and put exchange
rates under pressure, Neumann said.
European banks cut their exposure as the euro crisis
intensified funding strains. European Union regulators also
ordered banks to make sure they had core Tier 1 capital
equivalent to 9 percent of their risk-weighted assets by June
2012, either by raising fresh capital or shedding
By contrast, U.S. banks, which had already beefed up their
capital, reduced their lending to Asia in the fourth quarter by
just 0.8 percent. They had lent $785 billion to the region at
the end of 2011, less than half Europe's $1.684 trillion
exposure, according to Nomura's analysis of the BIS figures.
Since then, the European Central Bank's provision of about 1
trillion euros in cheap three-year loans has eased the funding
pressure on euro zone banks. Lenders were still tightening
credit standards in the first quarter of 2012 but not as
aggressively as in late 2011.
Thanks to the ECB's twin long-term refinancing operations
(LTROs), euro zone banks were under less pressure to shed assets
in Asia last quarter and may even have increased their exposure,
according to Nomura's chief Asian economist Rob Subbaraman.
But he said there were still reasons to be worried.
"As Asia still has a high level of exposure to European
banks, it remains vulnerable to a drastic cut of European credit
lines," Subbaraman said.
Among the economies at greatest risk if foreign lenders shy
away are Malaysia and Taiwan, where the claims of European and
British banks came to 20 percent and 15 percent of GDP
respectively at the end of 2011.
TROUBLE CLOSER TO HOME
Eastern Europe, by dint of geographic proximity and
financial integration, is potentially even more vulnerable than
Asia if the euro zone crisis intensifies.
Foreign banks, with Austria, Italy and France to the fore,
typically own 60 percent to 90 percent of bank assets in the
region, according to the European Bank for Reconstruction and
"Eastern Europe is right in the firing line. If European
banks are having to deleverage, their subsidiaries and the odd
branch in eastern Europe are the first place they look," said
economist Gabriel Sterne at Exotix, a frontier-market investment
bank in London.
The IMF's central case is that western European banks will
reduce their assets by $2.4 trillion in the next 18 months.
For the EU's eastern European members, that could translate
into a drop of about 4 percent in total private credit in
2012-2013. But in a downside scenario, the Fund reckons that
credit, the life blood of an economy, could contract 6 percent.
The BIS's most recent figures are somewhat reassuring.
Cross-border claims on emerging Europe, calculated according
to where lending banks are located, dropped $14 billion in the
fourth quarter of 2011. On the same basis, lending to Asia was
down $67 billion.
Jeromin Zettelmeyer, the EBRD's deputy chief economist, said
the ECB's two long term funding operations had bought time for
eastern Europe, as they had for the euro zone.
Real credit growth in eastern Europe had been "pretty bad"
on balance in the past few months, but deleveraging was
occurring at a manageable pace, he said.
Moreover, capital flows into the region were encouraging, as
was growth in local deposits. And, critically, the LTROs had
removed the tail risk of a funding crisis at big Italian banks
that have extensive operations in eastern Europe.
"There is certainly no uniform sudden stop taking place in
the region," Zettelmeyer said.
Nevertheless, western European banks were still under
pressure to shrink their balance sheets and some had taken the
strategic decision to pull back to their core markets.
"We're not in crisis mode, as long as things continue like
this. But we may well be in recession mode in some countries,"