A potential Europe Crisis will hit Singapore hardest

If Europe enters a full blown crisis, Singapore will be the worst hit Asian economy, according to a newly released Credit Suisse report. Singapore is exposed to Europe by several ways; Eurozone banks also make up a bigger proportion of domestic bank lending in Singapore than other Asian economies, the Eurozone directly account for more than 12 per cent of its GDP and private sector holdings of Eurozone debt and equities are the highest in the world outside of Hong Kong.[1]

Below is a chart from IMF, which shows the Consolidated Foreign Claims of European Banks on Asia (claims are on immediate borrower basis) as a percentage of GDP as of Q3 2011. Hong Kong has a stunning 160% plus of GDP tied up in European bank claims and Singapore has almost 80% of GDP tied up in European bank claims! The nearest to these 2 in Asia, Malaysia, has only 20% of GDP tied up in European bank claims. This means a rapid contraction in western European banks' balance sheets pose a greater risk to Singapore and Hong Kong:

"An escalation of the crisis with a disorderly, large-scale, and aggressive trimming of balance sheets could have a serious impact on Asia," the IMF said in a report released on Friday. 

Memories in the region are fresh of how quickly banks drew in their horns after the collapse of Lehman Brothers in September 2008. From peak to trough, the foreign claims of euro area and British lenders fell by around 37 percent and 21 percent of outstanding claims, respectively, the IMF estimates.  

World trade shrank by 30 percent. Asian economies slowed to a crawl, prompting China to start transforming the yuan into an international currency to reduce its reliance on fickle dollar funding. 

"If European Union bank deleveraging accelerates and even prompts banks from other regions to cut back, this will amount to a real pinch for Asia," HSBC economist Frederic Neumann in Hong Kong said in a note to clients. 

"A pinch, of course, is not tantamount to a systemic collapse, but it is uncomfortable nonetheless." [2]

Source : IMF

According to IMF, European banks play an important role in supplying credit to several Asian economies. As a result of a euro area financial turmoil, these banks could pare back foreign assets and a sharp deleveraging arising from an intensification of the euro area crisis could potentially cause a shock to credit supply in Asia:

" Such a credit crunch could arise from a withdrawal of wholesale funding to the domestic banking sector—and associated derivatives markets—or through a direct reduction in credit supply to the nonbank private sector.
...
Australia, Hong Kong SAR, Korea, New Zealand, Singapore, and Taiwan are the largest borrowers from European banks, while China, India, and the ASEAN countries generally have smaller liabilities. ... The financial centers, Hong Kong SAR and Singapore, which play a regional intermediating role, have much higher liabilities to European banks than do other regions of the world, with the exception of emerging Europe (which is far more interlinked with the euro area).[3]

Some must reads to understand the dynamics of current and upcoming financial crisis:

This Time Is Different: Eight Centuries of Financial Folly	Endgame: The End of the Debt Supercycle and How It Changes Everything	The Theory of Money and Credit

[1] - Singapore could be worst-hit Asian economy in full-blown euro crisis: Report
[2] - Emerging markets hold breath as EU banks shrink
[3] - THE LIKELY EFFECT ON ASIA OF A SHARP DELEVERAGING BY EUROPEAN BANKS