/ 9 June 2010

Asia warned of spill-over from European crisis

The International Monetary Fund (IMF) warned Asia on Wednesday of potential spill-overs from the European debt crisis, which is unfolding a decade after the region underwent its own financial turmoil.

“Adverse developments in Europe could disrupt global trade, with implications for Asia given the still-important role of external demand,” IMF deputy managing director Naoyuki Shinohara told a forum in Singapore.

On the financial front, he said major credit problems could result in a “significant spill-over” through funding channels, especially where banks depend on wholesale funding.

The crisis has also increased the potential for uncertainty and volatility in the outlook for capital flows, Shinohara said at the forum hosted by the Monetary Authority of Singapore, the de facto central bank.

He said Asia’s bright growth prospects, together with low interest rates in major economies, would likely attract more capital that could “lead to risks of overheating in some economies if appropriate policy action is not taken”.

“On the other hand, further increases in global risk aversion could see capital flows change direction quickly.”

Asia underwent a severe financial crisis in the late 1990s after a lending spree triggered currency volatility, resulting in the collapse of banks and companies across the world’s most populous region.

The region also suffered from the global recession triggered by the US housing market collapse two years ago, but is now leading the recovery.

Shinohara called on Asian governments to be wary of the potential risks from the European crisis and be prepared to take appropriate action.

“The key will be for policymakers to keep an eye on the bigger picture and be ready to act swiftly as developments unfold,” he said.

“With Asia’s economic muscle growing, the policy choices made in this region will have an important impact on the global economy,” he said.

Mounting debt crisis
Greece is at the epicentre of a mounting debt crisis that threatens to spread across the eurozone and has pulled down the currency to four-year lows against the dollar and eight year lows against the yen.

Shinohara said there was a risk that sovereign debt problems being experienced in some eurozone countries could spill over to others.

He said the strong fiscal position of most Asian economies provided the “space” to respond flexibly to the European crisis.

“In the event of spill-overs from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus.”

In a question-and-answer session, Shinohara said “we need to watch the situation very carefully and take actions as necessary”.

Shinohara reiterated earlier comments by IMF chief Dominique Straus-Kahn that there was little cause for concern over Hungary’s fiscal woes, which have been placed in the spotlight after comments by two senior political figures in Budapest on the state of the national coffers.

“I think the situation is much calmer and there is not much to worry about at this moment,” Shinohara said.

The IMF sent its new mission chief for Hungary, Christoph Rosenberg, to Budapest on Monday to discuss the economic situation and prospects. — Sapa-AFP