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'Spillover' alert
Published on Friday, 30 Sep 2011
Sean Craig

International Monetary Fund (IMF) resident representative Sean Craig this week painted a bleak picture for those working in the financial services sector.

Speaking at the Hong Kong Institute of Bankers’ (HKIB) Annual Banking Conference, the seasoned economist outlined several key challenges facing local lenders, among which those pertaining to the sovereign debt crisis in Europe remain the most worrying in his view.

“There are two main concerns facing Hong Kong at the moment,” he says. “The first is the risk of direct spill-overs from the crisis in Europe, and second is the higher uncertainty stemming from the lack of consensus among policymakers on how to respond.”

Much of Craig’s anguish stems from the still-unaccounted-for sovereign debt exposure of the continent’s smaller banks. These institutions, he explains, need to be adequately recapitalised in order to whether defaults and to help ensure confidence.
“Unless this is addressed, we project a contraction of credit across Europe,” he says. “This in turn will weaken economic growth, which will impact Asia in a way that’s already being reflected in the fall in equity prices and collapsed exchange rates we’re seeing.”

The precipitous declines, Craig adds, can also, be attributed to the on-going sluggishness in the US economy, where excessive mortgage debt and opaque fiscal policies continue to stymie growth prospects.

The combined effect of these forces, he says, has prompted a growing shift in capital to emerging markets, such as China and India, where yields are markedly higher than in the US and Europe. This, too, the representative cautions, poses a risk for Asian banks and their employees. "Credit expansion is always followed by an increase in non-performing loans," he says. "As such, we project significant rises in non-performing loans in Asia."