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Opinion

Emerging banks: threat of systemic collapse?

Economic growth in several major east Asian, Latin American and eastern European economies will halt in 1998. Emerging market banks' $550 billion of non-performing loans (probably well above $600 billion if unofficial estimates are correct) may cause a rash of failures ­ or even systemic financial crisis in some countries. Korea, China and Slovakia are among the most vulnerable.

Although this is unlikely to precipitate a global banking crisis, it will hit banking profits worldwide. And it will hasten the financial system shake-out in Japan, especially if structural reform in China leads to a collapse of the Hong Kong dollar peg (to which Japan's banks are vulnerable).

Other OECD economies will be affected too. Trade balances will weaken dramatically, as emerging economies have accounted for close to 40% of the developed world's merchandise export growth since 1989. Contraction in exports to emerging economies will chop GDP growth by 0.5% in Japan, 0.2% in Europe and 0.4% in the US. Lower investment spending will exacerbate that. I now expect global GDP growth to slow to 2.0% next year.

Shake-outs in emerging financial systems are more commonplace than you might suppose. Outside Africa, which has experienced a long list of failures, there have been 30 to 40 banking crises in the world since 1980, mostly in emerging economies.

The common feature was a rash of speculative poorly supervised lending, usually during a period of rapid economic expansion. On average, domestic credit grew three times as fast as GDP (in real terms). The inevitable result was that non-performing loans rose to unsustainable levels, often over 10% and even 20% of total lending.

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