According to London-based consultancy firm Capital Economics, the direct exposure of Latin American banks to the deepening crisis in Spain is not as great as it seems at first sight. Although concern about Latin America’s exposure to the troubled Spanish banking system is understandable, CE’s chief economist Neil Shearing says that “what matters is not the overall size of claims by Spanish parents on subsidiaries in the region, but the nature of the parent/subsidiary relationship.”
CE’s point is that most loans in Latin America are funded out of local deposits rather than via wholesale finance, which is the case of Emerging Europe. Here are their views on the issue:
“In Emerging Europe, for example, subsidiaries are highly dependent on financing from Western parents to fund local lending. The big risk is that this funding could be withdrawn in the event of a financial crisis in the euro-zone. But the situation is rather different in Latin America. Here, with the notable exception of Colombia, most loans are funded out of local deposits rather than via wholesale finance (see table 1). As a result, banks do not rely on parent financing and are thus much less vulnerable to the problems in Spain.”
Here are the 3 risks they see:
“…First, European banks might try to raise capital via their subsidiaries in the region – in effect, mandating Latin American banks to lend to parents rather than local households or businesses… the risks are real, but should be manageable… A second risk is that the euro-crisis ultimately triggers a collapse in counterparty confidence and a freeze in interbank lending similar to that seen during the Lehmans crisis. In such a scenario, Latin banks might struggle to rollover external debt… A third and final risk is that the euro-crisis triggers a global downturn that hits growth in Latin America and leads to a rise in local loan arrears.
Their overall sense is that Latin America’s banks are relatively well placed to cope, but say that “the bigger risk is that a weaker global environment exposes local vulnerabilities – most notably in Brazil and Colombia.”