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Should Asia look to Europe as an example of regional integration?

An alliance of national financial markets that preserves some differences, while standardising a range of financial practices and legislative frameworks, would make Asia more self-sufficient, argues Standard & Poor's.

The regional integration of national capital markets and the cross-border sharing of information and knowledge have never been more important for Asia, in our opinion. Asia is building on recent growth momentum and looking for productive ways to use its rapidly expanding wealth for its own benefit -- and to meet its own urgent development needs - in favour of seeing that wealth flow out to other markets.

We are far from suggesting an inward-looking regionalism, however. Globalisation is good for Asia; the international flow of goods, capital, and knowledge has been -- and will continue to be -- integral to the region's development.

But Asia does need to take concrete steps toward boosting its self-sufficiency in the interests of its long-term growth. The global financial crisis taught us the crucial role that local financial markets can play in instilling regional stability and it is in the region's long-term interests that its cross-border linkages are strong, balanced, and productive.

Given the region's scope and diversity, it would be unrealistic and unproductive to expect it to come together as some kind of tight-knit union of national financial markets in a one-size-fits-all manner. Asia is a diverse and evolving collection of economies at different stages of development and its financial markets often function in ways that differ from the traditional Anglo-American model. We envisage, instead, an alliance of national financial markets, preserving some differences but standardising and harmonising a range of enabling financial practices and legislative frameworks.

Asia's diversity can be a strength provided that its market players and policymakers can find coordinated ways to provide financial resources where most needed, and to create attractive regional investment options and returns for regional and global investors.

But how is the right balance of integration and local diversity best achieved? Just as the world will continue to learn from Asia's story of resilience and growth during recent difficult times, we believe that Asia will be well served by looking to Europe and assessing the ongoing effects, good and otherwise, of Europe's own regional integration since the 1990s.

Europe remains an example of fundamental tenets

Europe, despite its current sovereign credit concerns, remains an example of the broad goals that, in our opinion, Asia's policymakers, regulators and market participants cannot afford to ignore. In this regard, we believe that there are three tenets so inherent in the European marketplace, and so imbued in the collective mindset of its participants, that they have fundamentally defined its development over the past two decades, and inform its character today.

The first is information. By this, we refer not only to transparent and accessible financial information, but also to the depth and quality of information that comes with time -- the deeper knowledge of credit track records built up over years. The second is accessibility. In Europe, local and regional investors can access cross-border capital and equities markets and make the most of opportunities. Global investors can access the region much more easily than is the case in some parts of Asia.

The third tenet is consistency. By this we mean that there is consistency across borders, so that national economies are more-or-less as open as each another, and consistency of regulation such that investors favour the region as a whole, rather than channelling funds into selected economies and away from those perceived as less-open and more-difficult.

Let's take a brief look at what's happened in Europe in the past decade or so. Corporate and government bond markets have expanded significantly; in 2008, total financial assets in the eurozone were $42 trillion, compared with $55 trillion in the US. Since the introduction of the euro to financial markets in 1999, Europe's bond markets have become deeper and more liquid and the euro has surpassed the dollar as the most important currency for international bond and note issuance. By 2008, euro-denominated issuance made up nearly half the universe of international bonds and notes.

Another development of particular relevance to the Asian story is that Europe's stock market landscape has evolved to eschew national borders, more or less in step with the spirit and overarching intent of the European Union itself. In Europe, market participants are now basing decisions increasingly on industry and company factors and less so on country-specific factors, as stock markets across the region have become increasingly integrated. Europe-wide funds have also become a major market component; their share in the aggregate equity landscape has risen substantially in the past decade.

Also, Europe has seen rapid progress in the development of a mature and sophisticated credit culture, as well as a market that is deep and liquid enough to embrace, and benefit from, innovative and complex financial instruments. With this maturity and depth comes a certain resilience -- current sovereign credit concerns notwithstanding. While GDP growth for most European sovereigns has weakened, bond issuance has remained vibrant and there has been a healthy level of new ratings. Even its high-yield bond market has continued to develop.

Along with the positive lessons, heed the warnings

But, while Europe offers many positive lessons for Asia, it also comes with warnings. There is the need to rebalance Asia's growth model vis-à-vis competitiveness of industry and improvements to productivity. Some of the problems currently plaguing parts of the EU relate to the lack of competitiveness, and reflect a paucity of the right kind of investment over time. In Europe, we're seeing where unsustainable growth paths can lead -- where an over-reliance on easy credit fuels the asset-price bubbles that cascade to entrenched credit and macroeconomic problems.

In Europe there is also the risk that regulators, in response to the recent crisis, will place tougher regulations on banks on a country-by-country basis, which would weaken the cohesion of the region's financial markets. When individual governments implement local regulations, there is always the danger that this might weaken the competitiveness and attractiveness of their financial markets. In dialogues with regulators and financial supervisory boards, Standard & Poor's has stressed how critical it is to ensure consistency across regions when enacting new regulations and rules. We also have recently communicated with the Basel Committee on the Basel III set of new prudential rules that will apply to financial institutions, and we have stressed that some of the proposals could make it more difficult for banks to finance economic expansion.

Stronger cross-border linkages and greater accessibility

So, while we are far from positing Europe as a model for Asia to slavishly copy, we do believe that Asia may be well served by picking up on some of what has been achieved in this more advanced region. For example, Asia's public finance environment may witness a much-needed revamping and rebalancing of sovereign- versus local- and regional-government expenditure and revenue obligations. Reforms that allow all levels of government better access to capital markets will signal a positive step in this direction, and will be key to a deepening of capital markets in Asia and --consequently -- the eventual alleviation of pressure on sovereign finances.

Another key priority for Asia will be policies that promote and enable strong cross-border linkages, and mechanisms that allow for the better rechanneling of Asia's funds back into its own markets. Alongside this will be the goal of improving global investors' access to Asia's markets, which goes hand-in-hand with the development of fair and consistent regulation across those markets.


Most of Asia's economies posted better-than-expected growth in the second quarter. In the face of such momentum -- in some cases it has been quite spectacular -- we believe that it is imperative that policymakers and regulators do not lose sight of constraints such as insufficient social welfare, widespread poverty, and inadequate financial and legal frameworks. If unchecked, these factors will only act as dampeners to long-term growth and development.

In our opinion, there remains a lot of work to be done to make sure that Asia grows and develops in a balanced and sustainable manner, and the challenges of regional financial markets integration will need to be continually addressed. We believe that the deeper, more liquid, and more inter-linked the region's capital markets become, the sooner the region's economies will be able to make the transition from emerging to established market status and achieve the sustained growth that will enhance quality of life across the region.

Tom Schiller is the executive managing director and head of Asia-Pacific at Standard & Poor's.

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