Predictions and calls that Greece must restructure or default on its debt, and even leave the euro, have mostly been limited to political commentators and economics journalists. Banks, perhaps for obvious reasons, have generally been reluctant to join them. Many are exposed directly, all are vulnerable indirectly.
Although it stresses that “a significant deterioration in the Greek situation” is not its base case, Nomura nevertheless thought it wise to investigate the likely impact on Asian currencies if such an event did, in fact, happen.
According to the report, released on June 29, the Korean won and Indian rupee are most susceptible to a “Greek inspired market selloff”.
The won is exposed because of the openness of Korea’s banking system, in particular to Europe, and due to the Bank of Korea’s relative impotence to influence the currency market, evinced by its quite low ratio of foreign exchange reserves to GDP. India’s central bank also has relatively little market influence, but that country’s vulnerability is compounded by its current account deficit and large trade relationship with Europe.
Nomura examined a host of historical and present relationships. Among “financial channels”, it looked at past sensitivities to global risk aversion (the “beta” of each currency), the beta to moves in the euro, experiences during previous Greek-related risks, and local bond market positioning by foreign investors. In addition, it explored non-financial channels, such as the importance of lending from EU banks, the exposure of a country’s exports to the region and the “market power” of Asian central banks.
Korea has the highest beta against the global risk factor (proxied by MSCI global returns), and hence is most vulnerable to global risk aversion, followed by Indonesia, Malaysia, India and the Philippines. Regression analysis suggests that the won, Singapore dollar and rupiah are most vulnerable to a euro sell-off, but the won and rupee have suffered most during periods of heightened Greek debt concerns.
Nomura assumes that a significant worsening of the Greek situation would lead to a diminished appetite among European banks to extend credit. For instance, a Greek default or restructuring could cause them sizeable balance sheet losses, forcing them to scale down lending to Asia. Nomura believes the most affected would be Korea (the biggest regional debtor to French and German banks), Singapore and Hong Kong (because of their role as financial hubs) and India (due to its current account deficit).
The least susceptible to contagion, according to Nomura, are the Taiwanese dollar and Thai baht. Both have relatively closed banking systems and have substantial US dollar elements in their nominal effective exchange rate (NEER) management systems, which can be enforced through market power.
Quantitative analysis of historical trends shows that the Indonesian rupiah and Philippine peso are most exposed after the won and rupee. In Indonesia’s case, that is largely because of its comparatively unsophisticated markets and also heavy overseas positioning in its domestic bond market. The Philippine central bank simply has less market power than others.
Although, the Malaysian ringgit and Singapore dollar are not invulnerable, both currencies would be protected by the large foreign exchange reserves held by the respective central banks. Both also have similar NEER management systems, which “embed” a response to a depreciation of basket currencies — that is a permissible level of decline for their own currencies. Also notable, is that the ringgit and Singapore dollar have held up well during previous Greek anxieties, largely due to actions by the central banks.
Meanwhile, using past global disturbances as a guide, such as those in Europe in early 2010 and in the Middle East and North Africa a few months ago, the People’s Bank of China would likely put an indefinite hold on any change to its current peg.