Singapore risks being slammed by EU bank deleveraging

Whatever is in store -disorderly sovereign default or muddling-through with the Euro area intact - European bank deleveraging seems a forgone conclusion. In a default scenario, European banks would struggle for cash as interbank markets seize up. In a muddle-through scenario European banks would still shed assets, including overseas ones, to align capital adequacy ratios with new guidelines. The only difference is the time span over which deleveraging would occur. We address the financial linkages and discuss Asia's resilience to European bank deleveraging in this report.

Our main conclusions are:

• Asia will be adversely impacted by EU bank deleveraging. The risk of deleveraging spreading to banks from other geographies is also high. In the event, the impact on domestic credit expansion will be significant particularly in Korea, India, Indonesia and Malaysia.
• Past developments suggest that dollar liquidity shortages could become pronounced, particularly, in Korea and Malaysia.
• Withdrawal of portfolio investments is less of a risk than commonly perceived in most countries.
• In comparison with other emerging markets, Asia appears more resilient to a global liquidity squeeze.