How will the EU bank deleveraging affect Asian credit?

It would probably dry up a source of wholesale FX funding for banks and impede their ability to offer FX loans to clients, and Singapore is not an exception.

According to Morgan Stanley, while European bank deleveraging is unlikely to create major challenges to Asian credit conditions under orderly scenarios, it  would dry up a source of wholesale FX funding for banks and impede their ability to offer FX loans to clients – both of which point to more supply from both financials and corporates ahead.

Here's more from Morgan Stanley:

Market Implications

Supply will likely increase in 2012, most likely from IG corporates, which previously relied most heavily on bank lending. The proportion of first-time issuers should be high as banking relationships may need to be replaced by capital market relationships. The new issue premium may be stickier going forward as the funding flexibility previously offered by banks is diminished.

Key trades
We prefer Asia HY credit over Asia IG, since IG credit, both financials and non-financials corporates, faces greater supply risk.

We are underweight on Indian banks. Apart from having the most challenged financial profiles in Asia, Indian banks are also among the most exposed to an increase in cost and deterioration in availability of FX wholesale funding on the back of European deleveraging.