LatAm Preps for European FI Deleveraging

LatAm remains relatively well protected against European bank deleveraging despite the region’s obvious exposure to potential problems in the continent’s financial system, say analysts. Lending costs are already increasing as a result, but regulators are guarding themselves against sudden parent remittals. Arguably Chile is the most vulnerable with eurozone bank claims amounting to anywhere between 34%-40% of GDP. “Clearly, a problem with the Spanish banking system could amplify the liquidity crunch in the region, especially in Chile, but we do not believe it will be widespread if local banks do not partake in the crunch,” says Barclays Capital. According to the shop, European bank claims in the region amount to just 14.5% of GDP against 30% in EM Asia and 62% in EEMEA. Still European banks have been the dominant lenders in the cross border loan market in recent years, and their absence will clearly be felt. According to RBS, cross-border claims in LatAm from both European and UK banks reached about 67% of total foreign bank claims as of June 2011. This compares to just 5% from Asian banks, though their share has been accelerating over the last 11 years as trade links between the two regions grow. The withdrawal of European institutions is also being felt in the trade financing universe, where costs have increased substantially over the last few months. “Spreads are going up. In July-August they were paying 70bp-75bp for a new 1-year [trade financing line] and now it is 100bp,” said one banker earlier this month. Outflows through profit and dividend remittals by the parent is another source of risk, according Barclays, which notes that such outflows increased by 51% in Brazil during the 2007 crisis when both financial and non-financial institutions repatriated funds to headquarters. A similar scenario could unfold this time around as European banks move to meet 9% Tier 1 recapitalization plans, Barclays adds. That said, local regulators have prepared themselves agai