April 10, 2012 / 10:26 AM / 5 years ago

Emerging market credit shrinks though pace slows-IIF

WASHINGTON (Reuters) - Bank lending for emerging markets shrank early this year for the third straight quarter though at a slowing pace, while demand for loans in Asia contracted for the first time since late 2009, in a warning over the resilience of global growth.

The Institute of International Finance emerging market bank lending index stood at 48.6 in the first quarter, compared with 44.7 in the fourth quarter. Any reading below 50 shows deteriorating conditions.

The survey underscored the fragility of the global recovery ahead of a gathering in Washington next week of finance ministers and central banks from leading G20 economies.

"The global economy continues to face significant challenges, despite some recent encouraging signs," Charles Dallara, IIF managing director said in a letter to IMF policymakers.

The pullback in loan demand in Asia was concentrated in residential real estate. Credit standards also tightened in the region as bank officials attempted to prevent their economies from overheating, the IIF said.

Emerging markets face a tricky juggling act. Rising prices for energy, food and imported goods are pressuring inflation. Exports are beginning to decline especially to Europe as recession takes hold at the same time as domestic demand slows.

IIF chief economist Philip Suttle said he expects central banks in many emerging economies to loosen monetary conditions in the months ahead.


In Europe, moves to resolve its debt crisis through a second rescue package for Greece and the European Central Bank injecting billions of euros into markets have eased overall financing conditions markedly. This is particularly the case for eastern Europe where credit contraction was severe in 2011, the IIF said.

But euro zone policymakers need to avoid over tightening the fiscal screws. Countries implementing deep cutbacks in government budgets -- such as Italy, Spain, Portugal and Greece -- risk falling into a "vicious cycle of economic contraction and budget cutting," Dallara said in urging a more balanced approach to fiscal austerity in the EU.

The IIF also said it was "somewhat disappointed" by the 800 billion euro fund agreed by euro zone finance ministers to backstop countries facing sovereign debt problems. It would have preferred a larger fund along the lines of the 940 billion euro fund that Brussels had recommended, it said.

The case for strengthening the IMF's financial resources to handle crises remains "quite strong" given the challenges confronting Europe, Dallara said. Emerging market economies repeatedly have said they would like to see Europe put up more cash to handle its own debt problems before they bolster the IMF coffers, an issue that will be on the agenda at G20/IMF talks next week.

"A more forward leaning approach by Europe itself would help catalyze that process," Dallara said.

While the euro-zone bailout fund is a welcome first step toward building a convincing firewall to prevent financial contagion, the IIF said it needs to be followed by flexible usage of the money and steps toward constructing a fiscal union for the euro zone.

The IIF, which represents 450 financial institutions globally, repeated its call for strengthening the global framework for policy coordination, saying action is "sorely needed" to address global problems.

Leading emerging markets, such as Brazil, China and India, need a more active say in global affairs, it said. The IMF has agreed to give emerging economies a greater say in policymaking but the deal has yet to be implemented, a topic likely to be discussed at the IMF spring meetings on April 21-22.

The IIF, dominated by large global banks, also repeated its warnings against excessive and uncoordinated regulation of banks, which it said is worsening the availability of credit in Europe. As banks downsize their loan portfolios to meet new standards, it contributes to the region's recession, the IIF said.

Reporting By Stella Dawson; Editing by Andrew Hay

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