A report by the Institute of Economic Affairs found that stimulus measures pursued by Western governments in response to the economic crisis did not work.

Shadow Chancellor Ed Balls has repeatedly called on the Government to soften its deficit reduction plans and embark on a ‘Plan B’, which would include more public spending in an attempt to boost growth.

But the institute’s study said Plan B would be disastrous for the British economy, and that all Western economies needed drastic fiscal and tax reform if they were to overcome their sovereign debt crises.

Mark Littlewood, director general of the Institute of Economic Affairs, said: ‘We must resist the calls of those who say that one last, big spending push could get the economy back to meaningful growth.

The opposite is true.

‘Many Western economies might well be tipping back towards recession partly because of these giant fiscal packages that were enacted in 2009, and the coalition Government must resist calls for any Plan B that involves more government borrowing and spending.

‘The Government must be firm on deficit reduction – in fact it should go a lot further, and should look to robust supply-side reform to boost growth.’

The study concluded that the negative effect of Labour’s stimulus package in 2009 might even be being felt now, and that the UK might be experiencing faster growth if Labour had not increased spending.

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Maybe not its total evaporation, but certainly shrinkage with peripheral or weak countries falling off the currency’s map and in all cases, according to the experts, with a heavy price to pay.

Analysts agree that no country would emerge unscathed, at least in the short term. As for the long term? Well, few even dare to imagine the fall-out.

In the view of London-based Capital Economics, even a limited re-drawing of the eurozone’s borders, with the exit of the bailed-out trio of Greece, Ireland and Portugal over the next two years, would trigger a drop in eurozone gross domestic product (GDP) of 1.0 percent in 2012 and 2.5 percent in 2013.

That would equate to the same sort of economic contraction endured between 2008 and 2009 following the financial crisis triggered by the collapse in the US home loan market.

In a recent note to investors, UBS bank calculated that if a “weak” euro country like Greece gave up the currency it would cost every man, woman and child there some 10,000 euros (more than 13,000 dollars) each in the first year, and thousands more over the adjustment period.

Even a “strong” country like Germany would see a loss of between 6,000 and 8,000 euros per head in year one — between one quarter and one fifth of the country’s annual economic output.

According to Jens Nordvig of Japan’s Nomura Securities, Germany’s currency would rise against the dollar, but Greece would lose 60 percent of its money’s value. Italy, Spain or Belgium would lose around a third each.

While scope for exports would improve, debt restructuring on that basis would mean a dramatic rise in borrowing costs for those governments who write off the most.

National banking systems would collapse, experts say, due to a loss of confidence in the value of the currency that replaced the euro.

This isn’t rocket science panicking over hard-earned savings, experience shows citizens pull out what they can and flee while companies would struggle to raise investment capital.

If the economy stopped functioning normally, there would then be the threat of widespread social unrest. Germany, meanwhile, would lose export business due to a rising national currency and also the emergence of new, cheaper European competition.

It would be no different in the event Italy or some other big eurozone economy left.

Jacques Cailloux, a Paris-based economist with the Royal Bank of Scotland, told AFP that were France to exit the eurozone, Germany would suffer because “its banking system would be staring at exposure to French banking debt worth some 200 billion euros”.

US banks would be looking at 10 times that amount, Cailloux added ominously. Looking further down the line, Capital Economics believes prospects for ex-eurozone economies “may be improved by the ability of (these) former member states to set their own policy and allow their currencies to fluctuate.”

Wages would not have to drop under a devaluation, while suddenly a bottle of ouzo would not cost as much for others to import, for example.

“It’s hard to put a price on it, but clearly it would mean a huge cost, if not quite apocalyptic,” Cailloux said of the price for even partial eurozone break-up.

British banks and Asian-based multinational companies are already engaged in prudent contingency planning for the worst-case scenario.

And as Cailloux says, the problem is “everyone is going to have to plan for this eventuality, that’s the issue for 2012″.

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Speaking in New York late on Tuesday, chief executive Vikram Pandit said that the bank has already made $1.4bn in savings this year but needs to respond to slow markets by reducing costs further.

City A.M. understands that the cuts in the Europe, Middle East and Asia (EMEA) region involve six per cent, or 99 staff of its 1,600 capital markets front-office staff being laid off.

That is in addition to cuts in investment banking and mid- or back-office roles, which are said to be in the several hundreds.

Those made redundant will have to clear their desks this week after notices yesterday and today.

They will get at least three months’ pay with potential for more and the possibility of stock options being paid out.

Citi has said the cuts will produce a one-off cost of $400m. They will fall across numerous divisions within capital markets, including equities, fixed income, sales and trading.

Those familiar with the bank said that equities is likely to be hit hardest because it has escaped being cut as much as fixed income so far.

Overall, Citi has about 10,000 staff in London and 267,000 globally, which means the cuts announced on Tuesday amount to two per cent of its headcount, with Europe likely to take larger cuts than others.

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France is fighting desperately to retain its ‘triple-A’ credit status and has slashed spending and tightened up on tax revenues in an effort to stabilise its strained public finances but the markets are not convinced.

“Last week, the difference in yield between French and German 10-year government bonds breached 200 basis points, a euro-era record amid increased economic and financial market uncertainty in the region,” Moody’s Investors Service said.

“Elevated borrowing costs persisting for an extended period would amplify the fiscal challenges the French government faces amid a deteriorating growth outlook, with negative credit implications,” it said in a website statement.

Even though the spread between German and French borrowing costs has since narrowed slightly, France still pays “nearly twice as much as Germany for long-term funding.

“With the government’s forecast for real (gross domestic product) growth of a mere 1.0 percent in 2012, a higher interest burden will make achieving targeted fiscal deficit reduction more difficult,” it said.

The agency, one of the top three credit-rating groups, said “the domestic and external economic growth outlook presents significant downside risks.

“The French social model cannot be financed if the French economy’s potential is not preserved,” it said, adding that managing the eurozone debt crisis only makes the government’s task harder.

The crisis “will influence the value and credit quality of sovereign assets on French banks’ balance sheets and affect their funding costs and capacity to lend and bolster the economy,” it said.

At the same time, Moody’s said that despite the deterioration in the debt profile and the potential for increased costs, the rating level itself appeared safe for the moment.

The problems facing France were highlighted again on Monday as the financial markets faced fresh turmoil, finding no support in a right-wing government winning power in Spain and fearful that efforts to reach a bipartisan deal to tame the massive US debt were about to fail.

If the Washington talks do fail, as most feel is now likely, then the US debt problems would take centre stage, compounding the eurozone crisis.

Analysts in Paris said Moody’s warning was hardly surprising, highlighting the difficult situation France and the eurozone face as the crisis saps confidence and encourages investors to seek out safety at all costs.

Moody’s statement highlights the fact “that France no longer deserves its triple ‘A’ rating,” said Laurent Geronomi at Swiss Life Gestion.

“The markets are going even further and wonder now when France is going to lose its triple A — before or after the (May 2012 presidential elections,” Geronomi added.

President Nicolas Sarkozy, lagging in the opinion polls, says he will do everything possible to ensure France keeps its top rating.

The stakes could not be higher.

“France is caught up in the contagion spiral,” said Frederik Ducrozet, bond strategist at Credit Agricole.

“The government can announce all the austerity measures it likes but the country is trapped now in a vicious circle,” he said.

Edward Hugh, an independent economist based in Spain’s Catalonia, warned that until Germany, Europe’s paymaster and largest economy, puts up the money to back weaker eurozone states, “this is not going to stop.”

Paris faces a real problem, Hugh said. “The French banking system has 400 billion euros’ exposure to both public sector and private sector debt in Italy … so if anything happens to Italy, France has gone.” – AFP.

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Many aspects of the property and mortgage market have been encouraging in recent months, with Barclays relaunching into 90 per cent mortgages and Nationwide improving its availability of high loan to value (LTV) loans.

The story over the summer was one of improving mortgage rates and more competition in the market that was providing more opportunity for borrowers to make savings, says David Hollingworth from mortgage brokers London & Country.

Landlords have been rubbing their hands with glee over rising rents and lenders have been getting on board. The volume of buy-to-let mortgages has jumped by 16 per cent in the last quarter, according to the latest figures from the Council of Mortgage Lenders (CML), totalling 34,500 in the three months to September and marking its highest level in three years.

Nottingham Building Society currently offers a deal at 4.19 per cent, albeit with a hefty £1,299 fee, fixed until February 2014 for borrowers with a 25 per cent deposit. In one recent move in the buy-to-let market, Woolwich improved the maximum LTV it would offer to wannabe landlords to 75 per cent.

However, Mr Hollingworth says the trend for ever cheaper mortgage rates is one that is on the turn, and points to rate changes this week from Nationwide, Woolwich/Barclays, Skipton and ING.

Although lenders have been seemingly more competitive, he reminds homeowners that the amount of lending in the market has not increased and could fall back a little depending on how the eurozone pans out.

“The continued problems in the eurozone have resulted in an increase in funding costs for lenders and that is feeding through to the mortgage products in the UK,” says Mr Hollingworth. “Some may have come down a little but these tend to be the exception to prove the rule.”

New CML statistics also show that the number of loans dipped in September. There were 48,200 loans taken out for house purchase in September (worth £7.1bn), down 2 per cent on August, although up 3 per cent compared with September 2010.

For remortgaging, there were 34,200 (worth £4.3bn), representing a 1 per cent decline the month before, but a 25 per cent uplift on a year ago.

For anyone wanting to remortgage now, the experts say that this could be the ideal time to switch to a fix. Fixed-rate mortgages offer protection against future rises in interest rates anyone looking for security should act now.

“Several lenders have increased their rates in recent days, often with little or no notice at all, and I expect this to continue,” says Andrew Montlake from mortgage brokers Coreco. “With this in mind it seems that we have now passed the lowest point in the current interest rate cycle and it does seem sensible to look at locking into a rate now.”

He argues that even if the situation begins to settle and more competition returns to the market, it is still highly unlikely that rates will come back down below the current levels.

“The potential upside of rates getting lower is a small one, while the downside of rates getting ever more expensive once more is much larger and there are many, who feel they have ridden their luck long enough,” says Mr Montlake.

Even with no indication that we will see an upward movement in base rate soon, fixed rates still look appealing. Top deals include the 2.89 per cent fix (until November 2014) from Yorkshire BS at 75 per cent LTV with a £495 fee and for first time buyers (FTBs).

Skipton is offering a 95 per cent LTV deal costing 5.99 per cent until January 2014 with a £195 fee, and HSBC has a fee-free 4.89 per cent loan at 90 per cent LTV, fixed until January 2017.

Helen Adams from FirstRung Now.com has concerns about the future for new homeowners. Deposit demands are still a huge hurdle but this week first timers may have had some good news in the shape of Clydesdale and Yorkshire offering attractively priced mortgages with as little as 5 per cent deposit, at a rate of 5.49 per cent fixed for three years, with a fee of just £599 (although this rises steeply to 6.12 per cent for 95 per cent LTV loans). However, Ms Adams predicts that things could soon turn sour.

“I foresee more hesitancy from lenders towards FTBs,” she says. “The trend for parental help will continue. My advice: keep your head down, tighten your belt and save. You never know what’s round the corner.”

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The Bank of England said the crisis in the eurozone and slowdown in the global economy have deprived UK lenders of access to vital funds.

Britain has a one in three chance of tumbling back into recession but the squeeze on household finances is finally coming to an end, the Bank added yesterday.

Governor Sir Mervyn King said the UK economy ‘could be broadly flat until around the middle of next year’ as the Bank slashed its forecasts for growth and inflation.

Weaker growth threatens to blow a hole in the Chancellor’s plans to slash the record deficit racked up by years of borrowing and spending under Labour.

It piles pressure on George Osborne to produce a comprehensive plan to boost economic growth in the Autumn Statement at the end of this month.

In its latest inflation report yesterday, the Bank said British lenders have found it increasingly hard to raise funds since the eurozone debt crisis escalated over the summer.

One key funding measure – the cost of insuring UK banks against default – rose ‘significantly’ in August and September to above the level seen ahead of the collapse of U.S. investment bank Lehman Brothers.

The report warned that if the ‘strains’ on the UK banking system persist, it will hit households and businesses ‘as banks pass on higher funding costs to borrowers and scale back lending’.

That would wreak havoc in the housing market and leave millions of small businesses already starved of the loans they need to prosper facing collapse.

The Bank slashed its economic growth forecasts to around 1 per cent for both 2011 and 2012 from the 1.5 per cent and 2.2 per cent predicted in August.

It pencilled in growth of around 2.5 per cent in 2013 but conceded that the ‘prospects for the UK economy have worsened’ over the summer.

Sir Mervyn said the crisis in the eurozone is the ‘single biggest risk’ to Britain and admitted the Bank has ‘no idea how this will be resolved’ in an attack on dithering politicians in the single currency bloc.

Official meetings come and go but the underlying global problems remain,’ said Sir Mervyn. ‘The journey to a more balanced world economy will be long and arduous.’

But he added that inflation will ‘fall back sharply next year’ towards the 2 per cent target from the current level of 5 per cent.
‘The extraordinary squeeze on real take-home pay that we have seen in the last three years should now begin to come to an end,’ he said.

It was the one silver lining in a bleak report.

Last night experts warned that the Bank’s report may be ‘optimistic’. Vicky Redwood, chief UK economist at Capital Economics, said: ‘Even the Bank’s downgraded growth forecasts still look optimistic to us. We expect zero growth next year.’

Ross Walker, chief UK economist at Royal Bank of Scotland, said: ‘The UK economy isn’t back in recession but it is on the edge. We are stalling.’

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“Credit has been growing at an extraordinary pace, particularly for loans in foreign currency,” the IMF said in a report released today. Such growth may “lead to a worsening of average credit quality” and create “strains on bank funding,” it said.

The U.S. Fed’s pledge to keep borrowing costs at near zero through at least mid-2013 and credit tightening in China have spurred loan demand from Chinese companies in Hong Kong, where a currency peg means the city’s interest rates track those in the U.S.

Chief Executive Donald Tsang warned last week that there’s a 50 percent chance the global economy will shrink next year and Hong Kong may see “a couple of quarters of bad times” as Europe’s debt crisis roiled markets.

While the development of offshore yuan business is “positive” for the city, growing deposits in the Chinese currency may intensify competition for deposits in other currencies that result in higher funding costs, the IMF said.

China needs to raise the convertibility of its capital account to encourage yuan repatriation as the offshore market continues to grow, it said.

Raising Rates

As Hong Kong-dollar loans rose with contracted deposits, the loan-to-deposit ratio in the local currency increased to 87 percent by the end of September from 78 percent a year earlier, Hong Kong Monetary Authority data released on Oct. 31 showed.

There is scope for the city’s banks to further raise interest rates on demand for loans, Norman Chan, head of the HKMA said Nov. 4.

The city’s de facto central bank asked lenders in April to reassess their funding plans amid concerns that “unsustainable” credit growth will curb liquidity and cut loan quality.

The rising liquidity strain may hurt bank asset quality and limit earnings growth, China International Capital Corporation Ltd. said in a report this month.

The IMF expects Hong Kong’s economy will slow to 4 percent in 2012, down from 5.75 percent this year, on weaker export demand.

Should the European crisis worsen and bring a “sudden downside shock” that cuts global growth by 3 percentage points, the city will fall into recession and the city government should prepare to adopt immediate fiscal stimulus such as tax reductions, the fund said.

Cash Handouts

Hong Kong will take “appropriate measures” to stabilize its monetary and banking systems if necessary, HKMA’s Chan said today in a statement in response to the IMF’s report. Financial Secretary John Tsang said the city will act “against any possible adverse events.”

Hong Kong skirted a recession in the third quarter, when the economy expanded 0.1 percent from the previous three months, government data last week showed. Low unemployment and increasing numbers of Chinese tourists boosted consumption even as Europe’s crisis crimped exports.

“Domestic growth is quite strong, the economy appears to be operating above potential,” Nigel Chalk, the IMF’s Washington-based China mission chief, said today via a video teleconference.

“From a macro-economic perspective, you don’t see the need for universal transfers” to households via one-off measures including cash handouts and such temporary policies could be discontinued in the upcoming budget, he said.

Inflation Eases

The city will address the needs of the middle class in the budget in February, Donald Tsang said last month after announcing relief measures for low-income families. The government doled out HK$6,000 ($771) in cash to each permanent resident in a budget U-turn in March this year.

Besides weakness in global trade, Hong Kong is grappling with elevated inflation and the risk of a slumping housing market. Consumer-price growth will ease to a range of 4 percent to 5 percent next year on slowdown in global economy and food price gains imported from China, the IMF said.

Residential property prices slid to the lowest in more than six months last week as the threat of recession continues to dent buyer sentiment, after home prices surged to about 70 percent since the start of 2009 on low mortgage rates and an influx of Chinese buyers.

The financial secretary Tsang said Oct. 27 he sees “downside” risk in the home market on the chance of a global economic slowdown.

Social Burden

There are signs that the city’s property market may cool, while it’s still early to determine if such a slowdown will persist, the IMF said.

The government’s reintroduction of a government-subsidized home plan is appropriate to lessen the social burden on renters and new households that do not yet own a home, according to the report.

Rising property and inflation have led to criticism of the city’s linked exchange rate system, which Hong Kong has maintained since 1983.

Proposals to change the peg are “ill- conceived” as that would sacrifice the city’s monetary and financial stability, the IMF said.

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The Telegraph reports on job cuts at two of the UK’s leviathon banks, HSBC and RBS.

HSBC has long made it clear that thousands of jobs would go, now according to the Telegraph we’re seeing the axe fall in the firm’s Global Banking and Markets division.

Certainly in it’s interim management statement this week HSBC reiterated its intention of cutting costs by between $2.5bn and $3.5bn. It also said that the number of full time employees had been reduced by 5000 since the start of the year.

This action comes at the same time as the drama over whether the firm will quit the UK drags on.

Yesterday Stuart Gulliver, HSBC’s chief executive, said he was prepared to wait until 2013 to make the decision based, he said, on how the UK government implements banking reform. The key is whether HSBC will be forced to raise more debt to cover potential losses.

Meanwhile, at the 83% state owned Royal Bank of Scotland we’re hearing that around 2,000 staff at the Investment Banking arm are to be handed their P45s, in some departments this will translate to 20% of staff.

So what does this all mean for UK PLC? Well, job cuts are dreadul for those going through them but they are hardly a new part of the economic landscape and Britain’s finance sector is relatively nimble at re-absorbing talented people who may temporarily have fallen on hard times.

The HSBC threat to leave the UK has been going on for years. The “stated” issue now may be the Independent Commission on Banking’s proposed reforms but really the issue is that HSBC is a massive player in Asia. As more growth and profits come from emerging markets, so the temptation to be headquartered in the East grows (although that won’t stop Paris or Frankfurt having a crack either).

The danger for the UK is not only that it could lose a very handy tax stream, it is also that HSBC may be the thin end of the wedge. If it goes, then Standard & Chartered could follow and the power of London as a financial centre could evaporate.

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The European Financial Stability Facility (EFSF) was forced to pay slightly more to lenders to make the funds available because of the eurozone’s worsening debt crisis. But the cost to Ireland of borrowing this money will not be significantly more expensive, according to experts.

Donal O’Mahony, of Davy Stockbrokers, said the next tranche of bailout funds would not end up being more costly for the country.

“This is the first 10-year funding the EFSF has raised for Ireland at 3.5pc. This is in line with the price of raising bailout funds for Portugal in June,” he said. It raised money at 3.4pc then, just below the cost of the new funds.

The exchequer finances were plunged into crisis last week after the EFSF delayed raising the new money pledged as part of the bailout after lenders demanded a higher interest rate on foot of the latest Greek crisis.

Costs

Fund officials said Ireland would suffer if it had gone ahead then, as it would have had to pass on the additional costs. This would mean Ireland would be forced to pay a higher rate of interest on this money.

Yesterday, the Luxembourg-based fund said the deal attracted more than €3bn worth of orders and met with “solid demand”.

EFSF chief executive Klaus Regling said he was pleased the fund had again attracted investors from all over the world, with a satisfactory overall amount despite a “difficult market environment”.

But the market conditions have become more difficult for the EFSF, with one analyst saying this deal is “a complete level-changer, a completely new world” for the fund. “This will be the new reference point”, for any future 10-year deal, David Schnautz, of Commerzbank, said.

Bond issues

The EFSF, which was established in June 2010, previously raised €13bn from three bond issues this year but it is struggling as the debt crisis escalates.

Its existing loan notes have underperformed European benchmark debt.

“The EFSF is paying the price for being a relatively new issuer, and for the increasing concerns about a sustainable solution for the peripheral economies,” Ivan Comerma, of Banc Internacional d’Andorra, said.

There is still no clarity about what a new EFSF mechanism will look like, which is a concern for lenders who are being asked to provide more money.

“You’re being asked to invest in something that could change shape relatively radically,” Richard McGuire at Rabobank International in London said.

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This latest so-called “negative feedback loop” from the euro zone sovereign debt crisis is yet another potentially damaging blow to a global economy already experiencing shocks to both business sentiment and planning as well as bank funding strains.

An echo of the global reverberations caused by the Lehman Brothers bust through the winter of 2008/09, this transmission mechanism may have weakened slightly over the past two years due to more regulatory safeguards but still underlines the viral impact of banking shocks in an interconnected global system.

It also illustrates why many emerging economies have as much interest in the resolution of the euro crisis as leaders of the Group of Seven rich nations or even the Europeans themselves.

Regional exposure of European banks to their emerging neighborhood in central and eastern European is clear.

“The region could be in for a much bigger shock this time around because its economies are so tightly linked to the euro zone,” Piroska Nagy, adviser to the chief economist of the European Bank for Reconstruction and Development, told Reuters.

A lending crunch could hurt much further afield too.

“The possibility that European banks might reduce their exposure to Asia as part of their recapitalization effort is something that has to be taken seriously,” Deutsche Bank’s Michael Spencer told clients, warning of risks to the likes of Vietnam, South Korea, Indonesia and India.

TWO TRILLION CLAWBACK

In a report last week, Morgan Stanley reckoned that European banks may be forced to shrink their balance sheets by up to 2 trillion euros by the end of 2012, resulting in a drop in overall lending to emerging markets of over 500 billion euros.

“Investors have not properly calibrated the intensity of the negative feedback loop between developed markets and emerging markets via the ever important funding channel,” said the bank.

This is one of the reasons why the much-debated “decoupling” of faster-growing, more fiscally sound emerging economies away from the slow-grinding, debt-burdened rich world struggles to play out in the short term at least.

Emerging equities – MSCIEF,for a variety of reasons to do with sagging Western demand and early-year monetary tightening — have underperformed developed stock markets – MIWD00000PUS this year by seven percentage points.

The breakneck globalization of the past two decades that benefited so many developing economies was at least in part due to the opening of credit pipes from the giant global banks.

If those global banks, the lion’s share of whom were European, are now under the cosh from domestic politicians and regulators to both strengthen their capital ratios and focus on their home economies and businesses, that could spell retreat.

“We are not doing business which is not to the benefit of Germany or Poland,” the Commerzbank’s Chief Financial Officer Eric Strutz told analysts on Friday. “We have to focus on supporting the German economy.”

CRUNCHING THE NUMBERS

Given the sort of minimum capital ratios now being required of European banks — the European Banking Authority demands a 9 percent minimum by the middle of 2012 — Morgan Stanley expects cutbacks in assets or loans to be inevitable.

“The core bank function of lending to corporates and consumers is uneconomic at the current cost of wholesale funding, which makes deleveraging absolutely necessary,” the report said, adding as much as 1 trillion of the 1.7 trillion euros in bank debt maturing through 2014 would be allowed to roll off or not be refinanced.

Of $35 trillion of Western European bank assets outstanding, some $3.8 trillion, or 2.7 trillion euros, are in emerging markets — a rise of well over 300 percent in a decade and surpassing the mid-2008 peaks hit before the credit crisis.

These statistics from the Bank for International Settlements also show European bank lending to emerging markets at ten times their U.S. peers and now equal to the amount they lend to the United States as a whole. A decade ago European bank lending to the United States was twice that to emerging markets.

If there were to be a repeat of the 20 percent drop in European bank lending to emerging markets that took place in the 15 months after the credit crisis snowballed in early 2008, Morgan Stanley said that could see a lending shock of more than 500 billion euros.

That compares to total external financing needs of emerging market on a 12-month rolling basis of some 1.5 trillion euros.

Yet, “emerging markets” is a large and diverse group of countries and some are more vulnerable than others.

Even though 12-month external financing needs in emerging Asia are at almost 500 billion euros are close to the combined 549 billion euro needed in central and eastern Europe, Middle East and Africa (CEEMEA), the former markets are cushioned by national surpluses and hefty hard cash reserves.

The CEEMEA region, however, is right the firing line especially big deficit countries such as Turkey and Poland.

With average loan-to-deposit ratios at banks across the region in excess 100 percent and foreign bank ownership high, there is a vulnerability to wholesale funding stress as well as parent bank sales of so-called “non-core” assets.

This is a particular risk for eastern Europe and Africa — where European banks account for 91 percent and 85 percent of foreign lending respectively. And, as the credit crisis has proven, domestic banking instability quickly becomes sovereign.

There are some who say the anxiety may be overstated.

Acknowledging the threat of shrinking credit lines, ING’s global emerging markets strategist David Spegal points out that domestic banking assets in emerging markets were stronger than first seems.

Even excluding a relatively closed Chinese sector, European bank holdings of emerging bank assets when domestic bank assets are taken into account is just 19 percent.

Spegal also said a series of new regulations and monitoring regimes since 2008 would likely limit the risk of widespread or sudden exits by parent banks from local emerging markets.

Yet, many policymakers are already braced for fallout.

“The fear is that it would be easier for Western banks just to cut their exposure in eastern Europe,” said the EBRD’s Nagy. “The point is to make sure there is genuine recapitalization with EBA supervision required and not massive deleveraging.”

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