European crisis comes home

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SummaryThough the government has sought to downplay the impact of the European crisis on India, the facts speak for themselves.

Though the government has sought to downplay the impact of the European crisis on India, the facts speak for themselves. Economic Affairs secretary R Gopalan told Business Standard that the European banks’ exposure to India was only $18 bn, data from the Bank of International Settlements puts the figure at $148 bn. Another $73 bn is owed to US banks and around $22 bn to Japanese banks.

Interestingly, the exposure has been increasing dramatically, from $22 bn in January 2000 to $56 bn by March 2006; it crossed the $100 bn mark around September 2007 and the $150 bn mark by March 2011—by June, the last period for which data is available, the exposure had fallen moderately to $148 bn. Though it is not certain European banks will pull out of India, it is worth keeping in mind that European banks need around $150 bn to recapitalise by June 2012. Given this, it shouldn't come as a surprise if European banks start liquidating their India holdings any time soon. Some Indian banks have reportedly evinced interest in lending this amount to Indian corporates, but given the amounts involved, the picture doesn’t look that rosy. Also, with deteriorating balance sheets, lending such large amounts will also be difficult.

What will make a difference to how much European bank debt is in danger of being recalled, of course, depends upon the source of the funds—if Greek banks, for instance, require a larger amount of recapitalisation but India’s exposure to Greek banks is limited, then it doesn’t make a difference. Around $79 bn of the $148 bn is due to UK banks, $14 bn each to French and German banks and $9 bn to Swiss banks.

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