Worries about Greece's ability to stabilize its finances have eased in recent days amid news that European leaders have been orchestrating a bailout and the Greek government will take needed steps to reduce its mountain of debt.
However, an expert in Hong Kong said that it is still too early to say an end of the European sovereign issues and its spillover impact on Asian economies shall need continual watch-out, especially on the export-led small economies.
"Sovereign default in Europe is unlikely. The stronger countries would help support the weaker ones," said Robert Sabbaraman, chief Asian economist of Nomura, in an exclusive interview with Xinhua in Hong Kong, adding that the Euro might see a continual rebound from the current level.
After supportive comments by the European leaders eased some concerns about the high debt levels of Greece and other euro zone countries, the euro has gained and remained above 1.35 against the U.S. dollar in the past week.
However, investors should be watching "what is happening in Europe, particularly Southern Europe very carefully" and whether the risks could be contagious for Asia, said the economist.
Sabbaraman expected limited spillover impact from fiscal woes of the European countries to Asia. However, some Asian economies, especially some export-led small economies might be more exposed to a potential European debt crisis by three main avenues -- through equity markets, through European banks cutting their credit line to Asian banks and companies and through Asian exports, he said.
In terms of equity markets, Sabbaraman said heightened risk aversion may cause volatility in capital flows and lead to a sell- off in risk assets, including the Asian equities.
In terms of Asian banks' exposure via European bank lenders, he said the spillover impact is limited. However, the problem may get worse if stronger countries in the Europe face fiscal challenges too.
On the trade front, Sabbaraman sees little contagion from Europe in Asia "if the implications of a sharp slowdown remain stuck in select EU countries."
According to the economist, Vietnam may be the weakest link to potential European credit crisis among all the Asian economies, " because it has a very large budget deficit and current account deficit, plus rapidly rising inflation and high credit growth."
He also highlighted some other small export-led economies, such as South Korea, Malaysia, Singapore and Hong Kong.
In addition, India also has some exposure to the potential European sovereign issues due to the country's "bad fiscal position -- high public debt and large budget deficit."
The Chinese mainland, on the other hand, is among the lowest exposure to overall effects from Euro area, due to its strong economic fundamental, current account surplus, low public debt, strong banking sector and low external debt, he said.
Source:http://news.xinhuanet.com