Cash piling up in banks, as credit crunch fears loom

Funds are king amid uncertainty in Europe

By Goh Eng Yeow, The Straits Times, 21 Nov 2011

TO GRASP how a credit crunch can erupt with savage force in a sea of calm, consider the global financial scene exactly four years ago - and some disturbing parallels with events today.

In the run-up to Christmas 2007, the stomach-churning events of the global financial crisis were still 10months away. All seemed fairly well in the world.

But, with the benefit of hindsight, events back then clearly presaged the start of the crisis, though few would have believed then that the world's banking system was about to teeter close to the edge of the precipice.

At the time, thoughts of crisis were far from most investors' minds. The festering sub-prime mortgage crisis in the United States rarely got more than passing mention back then.

Instead, Singapore and the rest of the region were giddy with excitement over a vague proposal by China to allow its citizens to buy shares overseas, despite the strict controls it imposed on capital flow. Although the proposal was later quietly scrapped, the exuberance over this prospect stirred up regional markets to record high levels which have not been seen since.

But even then, there were signs that the world's credit markets were freezing up. To ensure that European lenders had sufficient cash to cope with the traditional year-end demand, the European Central Bank had to pump a staggering €348billion into the banking system in December 2007.

Christmas is around the corner again. As was the case in 2007, there are few signs of a credit crunch in Singapore.

But some superficial similarities between then and now are startling. Banks are again awash with liquidity and offering teaser rates as low as 2.88per cent to get borrowers to draw down on their credit lines.

There is even a housing boom to match 2007's bullish property market. Despite the spate of anti-speculative measures put in place by the Government, new private home sales still hit more than 1,000 units last month - the hallmark of a bullish property market - even though demand had weakened somewhat recently.

Although the party here is in full swing, there are spoilers who warn that Asia may once again face a credit crunch if a crisis facing banks - this time in Europe - intensifies.

Over the past two years, this banking crisis has gradually festered and escalated as heavily indebted countries such as Greece and Ireland struggled to service their burgeoning public-sector debts.

In recent weeks, the poison has spread to Italy whose bond yields soared to bailout territory of 7 per cent, prompting fears that the single euro currency, which it shares with 16 other nations, may be headed for destruction.

This is in turn triggering a credit crunch in Europe, which led to giant lender HSBC boss Stuart Gulliver to recently sound the alarm bell on the snowballing effect this could have on Asia if European lenders cut back on their lending to the region, as a result of problems in Europe.

'We need to be careful to monitor the risk of a sharp withdrawal of credit by Euro-pean banks as a result of events back home,' he was quoted as saying in Hong Kong.

Since he made his observations, Germany's second largest lender, Commerzbank, has announced it is scaling back to focus on lending at home and in neighbouring Poland.

It would spell trouble if other continental European lenders were to follow in its footsteps, as they together account for about 21 per cent of the US$2.52 trillion (S$3.2trillion) worth of international bank loans outstanding in Asia, excluding Japan, in the second quarter of this year.

But mindful of the credit crunch in 2008 and the devastating impact on their businesses, some companies are leaving nothing to chance, as they beef up their cash reserves while the going is good.

CapitaMall Trust is among those firms which have raised fresh funds to finance their businesses by placing out new shares.

The real estate investment trust netted almost $250 million recently from selling 139.66 million units at $1.79 apiece to finance capital expenditure and asset enhancement initia-tives on buildings such as The Atrium@Orchard and Iluma.

There has also been no let-up in firms going to the Singdollar bond market to raise cash. United Overseas Bank and Malayan Banking have each tapped investors for a cool $1billion by issuing 10-year Singdollar bonds earlier this year.

Even Hong Kong tycoons are doing it. Billionaires Li Ka Shing's Cheung Kong Holdings, Lee Shau Kee's Henderson Land, and Peter Woo's Wharf Holdings have all become active bond issuers here - despite the foreign exchange risk they expose themselves to, raising funds in Singdollars.

Savers here are also saving more furiously than ever, preferring to keep their money in the bank, where they get almost zero return.

Data from the Monetary Authority of Singapore shows that, as of end-September, Singapore residents have bank deposits totalling $341.73billion. This is 45 per cent more than the $236.29 billion they kept in banks at end-2007 before the financial crisis.

Sitting on so much cash and not putting it to more productive uses can only mean depositors sniff problems ahead.

There is the daunting possibility that things may get worse before they get better.

Investment bank Bank of America Merrill Lynch noted that in its recent survey of fund managers, 38 per cent of them expected Greece to default in the first quarter of next year.

No one knows exactly how the world's banking system will react to such a calamity, if it erupts. It is not surprising that cash sits on its throne, unchallenged as king in these uncertain times.