Europe crisis could affect trade for Asia, Africa

HONG KONG -- As European banks reduce international lending, it's hurting importers and exporters in Asia, Africa and Latin America, and raising fears of a trade-crippling global credit crunch.

Emerging markets depend heavily on a form of credit called trade financing, which gives exporters assurance they'll get paid for their goods. Without this guarantee — which often comes in the form of a bank-issued letter of credit — trade with emerging markets could fall sharply, because buyers may not be able to pay for purchases immediately and exporters won't feel comfortable shipping goods.

European banks, which have a strong presence in emerging markets such as Latin America and Asia, account for more than a third of trade finance loans worldwide, according to Barclays Capital. French bank Societe Generale has said it's considering whether to cut back on export loans and other types of lending. Germany's Commerzbank is pulling back on all lending outside Germany and Poland.

"It's difficult to see how we won't be in a serious credit crunch in 2012, one that will hit trade," says Steven Beck, head of trade finance for the Asian Development Bank (ADB). "It will mean that it's harder for companies to import and export, which will impede global economic growth and job creation."

That could plunge the global economy into another recession, he says.

The cost of trade financing has doubled recently in Asia, according to Robert Rennie, chief currency strategist for Westpac Banking, one of Australia's largest banks. It's also become harder to get those loans as European and other banks reduce lending to comply with international accounting rules mandating they maintain higher capital levels.

In China, a growing number of exporters are finding credit hard to come by and demanding payment once they ship goods to buyers, instead of collecting payment later, according to Andrew Tananbaum, executive chairman of Capital Business Credit, a U.S. financing firm that supplies this credit to importers.

Amid the European debt crisis, ADB has seen demand for its trade finance program, which supplements private-sector credit in developing Asia, increase more than 25%.

The International Finance Corp. (IFC), a World Bank subsidiary that has a similar program to provide loans in emerging markets, including Asia, Africa and Latin America, says its loan volume has increased 30% in the last five months compared with the same period last year.

"We're sensing that there's more pressure on the European banks, and they're asking us to take on additional risk," says Rogers LeBaron, a senior adviser in IFC's global financial markets group.

As banks pull back on credit, the concern is that "the first thing they're going to cut off is the smaller, more difficult markets, like Afghanistan and Bangladesh," says LeBaron.

Even though trade finance tends to be a safer form of credit — it's a short-term debt obligation that usually matures when the shipment reaches the buyer — international accounting rules require banks to hold the same amount of capital on these assets as on higher-risk assets, giving them incentive to shed these loans.

Also, "many European banks are going through a painful adjustment process and this pushes them to exit all non-core businesses, even those lines that are profitable," says Frank Lavin, a former U.S. undersecretary of commerce for international trade.

In Asia, European banks are likely to pull back on lending at a "measured pace," allowing other banks to step in to plug any holes in credit, predicts Krishna Hegde, credit strategist at Barclays Capital. But in other emerging markets, where European banks are even larger players, it will be more challenging for lenders to fill gaps, he adds.