Euro Crisis to Hurt Korean Companies Most, Morgan Stanley Says

Companies in Korea, Thailand and Indonesia are the most at risk of default in Asia should a worsening debt crisis in Europe dry up dollar flows into the region, according to Morgan Stanley. (MS)

“The biggest risk to Asian credit markets of a worsening European debt crisis is a deterioration in global funding markets,” the New York-based bank’s chief Asia credit strategist, Viktor Hjort, wrote in a July 25 note to clients. “Funding market contagion represents real default risk.”

Korea South-East Power Co. and Hai Chao Trading Co. are among companies that postponed bond sales earlier this month, citing volatile markets, only to resurrect them when conditions improved. Europe’s debt crisis prompted Moody’s Investors Service to cut Greece’s credit rating three levels to Ca this week, its second-lowest ranking. The New York-based company said the European Union’s latest rescue plan for the nation will cause substantial losses for investors and amount to a default.

Banking systems in Asia that are most exposed include those with a significant reliance on wholesale, as opposed to deposit, funding and those in countries where there is limited government support from foreign exchange reserves, Hjort wrote. China’s “deep deposits” and currency reserves make it the least exposed, followed by Malaysia, according to the report.

EU leaders reached an agreement on a second rescue package for Greece worth 159 billion euros ($230 billion) on July 21 and strengthened the region’s bailout mechanism to offer protection to other euro-region nations in a bid to stamp out contagion from the crisis.

Markets in Asia remain highly “sensitive” to the euro crisis, and the U.S. growth outlook, and it’s “difficult to position a 100 percent Asia credit portfolio without a view on those global risks,” Hjort wrote.

To contact the reporter on this story: Katrina Nicholas in Singapore at knicholas2@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net

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