Asian banks still reluctant to lend to each other

Despite coordinated efforts by US, European and Asian governments, credit markets in Asia remain anaemic.
Banks in Asia are still reluctant to lend to each other despite the coordinated measures launched this week by US, European and Asian governments.

Bankers say the rates at which banks lend to their peers are expected to remain high in Asia at least for the next couple of weeks, despite moves to facilitate the flow of credit.

Fears of an impending recession and capital being locked in Treasury bills (T-bills) are cited by the bankers as key reasons for the continuing freeze in the Asian credit markets.

Three-month Libor, the most important rate against which to benchmark loans, derivatives and other financial instruments, hardly moved after governments in the UK, France, Germany and the US announced plans to pump liquidity into the banking system. Likewise, three-month Hibor (the Hong Kong Interbank Offered Rate) remains high in spite of the efforts by the Hong Kong Monetary Authority (HKMA) to boost liquidity.

Three-month dollar Libor was trading at 4.55% yesterday, down from 4.64% on Tuesday, but still high compared to the month-ago rate of 2.88%. In Hong Kong, three-month Hibor was at 4.35% yesterday.

On Tuesday, US Treasury Secretary Henry Paulson announced a package under which the American government will use $250 billion of the $700 billion bailout programme recently passed by the US Congress to buy equity stakes in American banks. That followed announcements by European governments that they were putting $2.3 trillion towards safeguarding their own banks and guaranteeing interbank lending.

In Asia, Australia, New Zealand, India and Hong Kong have pumped billions into the money markets and guaranteed the deposits in their respective banks.

ôYou would expect the money market to ease up [after the bank measures], but it will take weeks,ö says a Singapore-based DCM banker. He reasons that a lot of capital is parked in T-bills that have two to three months to go before they mature, and people are holding on for maturity to get their principal back.

A second DCM banker says that it would be unrealistic to look for a quick return to market conditions that prevailed before Lehman Brothers collapsed in September, let alone to the conditions before the credit crisis erupted in 2007. Investment bank Lehman Brothers went bankrupt last month, accelerating the financial crisis.

Banks have been unwilling to lend to one another out of fear that other banks too may collapse. The reluctance has boosted interbank lending rates, which dictate the cost of much of the lending in the wider economy. Higher interbank lending rates mean it is harder and more expensive for businesses and consumers to get credit, which in turn will make the economic fallout from the financial crisis even worse.

Both bankers say that compounding the credit crunch in Asia is the concern about an impending recession, which is further spreading fear among the banks. Most of the research houses have warned that ChinaÆs economy will slow down to 8% in 2009, dragging with it other export-driven Asian economies.

ôI am expecting a dramatic slowdown in the Chinese economy and other major Asian economies,ö the first DCM banker says.

Rajeev De Mello, portfolio manager at Western Asset Management, says that Asian countries are exposed to the global slowdown through their financial markets, their exports and also through sentiment.

ôWhile their domestic growth does provide some cushion against global trends, a synchronised recession in major economies would continue to negatively affect Asian economies,ö De Mello says.
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