Asia’s Exposure to Europe’s Woes

Europe’s debt troubles could hurt Asia’s economies in a very vital way: depressed demand for exports.

Most analysts this week have downplayed Asia’s exposure to debt problems in Greece and its southern European neighbors. And the European Union deal announced Thursday to backstop Greece could stave off the worst.

On the surface, it seems right that there are no Greece-like sovereign debt problems in Asia. Asia’s government balance sheets outside Japan and Vietnam are in excellent shape, with about $5 trillion of foreign-exchange reserves backing up economies that have manageable budget deficits and restricted borrowing from abroad. Local banks are better capitalized and solid economic progression should keep default rates low.

But there’s more to dread than just a sovereign default pollution spreading down the Silk Road. Asia’s real worry is that Europe’s debt woes will drag down the Continent’s economic recovery, dampening demand for Asian goods. A weak euro doesn’t help Asia either, as it becomes more expensive for Europeans to buy Asian products.

Rob Subbaraman, economist at Nomura in Hong Kong points out in a research note that the “quid pro quo of avoiding a full-blown financial crisis [in Europe] is weaker economic progression.”

And of course, a full-blown European financial crisis isn’t very excellent for economic progression either. Mr. Subbaraman lays out a negative scenario where Germany and France are saddled with southern Europe’s debts, hurting output throughout the region. Because southern Europe’s euro denominated nations can’t devalue their currencies to wait competitive, “it is conceivable that to support these economies, a new form of protectionism takes house, whereby countries such as France and Germany buy more goods from them at the expense of Asian exports.”

So how exposed is Asia to Euro-Zone trade? Quite a bit. It’s not as much as to the U.S., but there’s small doubt a wider European slump would hammer Asia.

Vietnam, already the sickman of Asia with its devaluing currency and inflation problems, counted on exports to the euro-Zone for 8.9% of its GDP in 2009, according to Nomura.  Exports to the U.S. were 13.1%. China?s exports to Europe were 3.6% of its GDP, compared to 4.7% for its exports to the U.S. Hong Kong and Singapore, vital trading centers, counted on Euro area exports for 13.2% and 11% of GDP respectively.

Fears of a European slowdown hurting Asia aren?t theoretical. The EU reported today that euro-zone progression rose a weaker-than-expected 0.1% in the fourth quarter. Italy and Spain both shrank in the fourth quarter, perhaps a sign inventory restocking is over, and that the recovery ? at smallest amount in Europe -  is running out of steam.

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