Bloomberg News

European Debt Crisis Cuts Lending to Emerging Markets, IIF Says

January 24, 2012

Jan. 24 (Bloomberg) -- The Institute of International Finance said net private capital inflows to emerging economies will fall 18 percent to $746 billion this year as the European debt crisis erodes the ability of banks to provide funding.

The flow of investment in emerging markets was an estimated $910 billion in 2011 and is projected to rise to $893 billion in 2013, the Washington-based global lobby group for financial companies said in a statement today.

Bank lending showed the largest decline and the IIF estimates net flows from banks to emerging markets will be “quite weak” for the whole year, Charles Dallara, the IIF’s managing director, said at a meeting in Zurich today.

“The crisis is contributing to bank deleveraging, which is damaging the prospects for both growth in Europe and for capital flows to emerging markets,” he said.

Funding conditions deteriorated the most in emerging European countries, including Hungary and the Czech Republic, according to the institute. In a survey of banks in those countries, 63 percent said credit standards had tightened because of financial strains in the euro area.

The European Banking Authority’s new capital rules requiring euro-area banks to achieve a 9 percent core Tier 1 capital ratio by the middle of this year is triggering asset reductions.

“In an environment where raising new capital was extremely expensive, euro-area banks responded by accelerating asset shedding, especially in foreign markets,” IIF Chief Economist Philip Suttle said.

The IIF said it expects net commercial bank flows to emerging markets to drop to $38 billion this year from $137 billion in 2011.

--Editors: Jon Menon, Steve Bailey

To contact the reporter on this story: Carolyn Bandel in Zurich at cbandel@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net


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