The Effects of the Euro Crisis on Asia

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Introduction

In this essay I will explain the different effects of the euro zone debt crisis on some of the Asian countries. These countries include China, Indonesia, India, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Japan and Taiwan. My aim is to cast light on both the negative and positive impacts of the crisis. I will try to reveal the negative effects for Asian countries, and the inconveniences what these effects cause to Europe as well. It is important to examine what kind of role Asia has in these turbulent times, because this helps us understand the actual situation, and it also helps to forecast what would happen in the future, in order to prepare economically. It also makes us able to learn from the crisis, to learn what are the possible ways of successfully react to the changing economic environment.

1.The Negative Effects of the Crisis

In this chapter I will focus on the negative impacts of the debt crisis. I will write about the disadvantages for both Europe and Asia.

1.1Slower Growth of Asian Countries

In this chapter I will try to assess those factors which mean possible threats for the Asian countries’ economies. First of all we should examine the risks coming from the direct losses of Asian investors on eurozone assets. We can say that it is not the most dangerous threat for the Asian countries. Their investments held in euro are just a small percent of all their investments. Hong Kong and Singapore are the ones who are most at risk from this factor, but even if their external assets would suffer losses, the damage caused to Asia wouldn’t be serious. (Emerging Markets Monitor., 2011.) According to Zhang Zhixiang, a former head of the People's Bank of China international department, and Zhang Chao, an economist for the China Development Bank, the euro crisis will not have as serious impact on China’s economy as the U.S. debt downgrade, because as they wrote: “euro assets make up far less of our country's foreign exchange reserves than the dollar". (www.telegraph.co.uk., 2011.) As for the banking sector, it is true that Asian banks’ exposure to the European banks currently in trouble is relatively small. Besides, large Asian banks can even help to fill the gap left by crisis hit European banks. (Lamont, J., 2011.) It is a more threatening fact that the flow of capital from Europe to Asia decreases thanks to the crisis. “According to the Bank of International Settlements (BIS), European banks are the source of one quarter of all bank lending to emerging Asia.” (Emerging Markets Monitor, 2011.) As the crisis deepens, foreign capital that comes from Europe flowed back, because every country would like to rescue its own financial system. (Asia Pulse., 2011.) There is less euro lending into Asia. The IMF warned the region’s policymakers to prepare for the situation that foreign banks could sell their assets or cut off credit to cover the losses at home. They also emphasized in their report, that there would be capital outflows from the region, because foreign investors “could reverse the large positions they have built in Asian markets since 2009.” (Euronews., 2011.) In India for example, - according to the Financial Times - companies, who are already struggling with rising domestic borrowing costs, now face the fact that there is a retreat of financing by European banks, they can borrow less for their expansion projects, and this means a capital crunch for many of them. (Lamont. J., Mishkin. S., 2011.) David Carbon, head of economic and currency research at DBS Bank Ltd. says that, one of the most serious risks now is that if there will be a credit crunch in Europe’s banking sector, it could cause a credit crunch in Asia as well, like in 2008. (todayonline.com., 2011) The factor which means the biggest danger for Asian countries is the decreasing demand from Europe for their products. Exports are slowing down, and it is a great problem, because the majority of Asian countries are...
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