China’s Surging Influence in Latin American Finance

[author: SumeetChugani]

How will bank subsidiaries in Latin America weather the European and U.S. financial crisis?

Moody’s Investors Service recently placed 15 Mexican and Brazilian banks and insurance groups on review for down grade of their short- and long-term debt and deposit ratings. The rating agency said it made the decision in part because of the potentially diminished capacity and/or willingness of those banks’ parent companies in the U.S. and Europe to support their subsidiaries in Latin America.

Latin American Advisor Newsletters’, InterAmerican Dialogue asks these questions:

  1. To what extent do the problems of U.S. and European based banks transfer to their subsidiaries in Latin America?
  2. In what ways could these parent companies fail to provide enough support to their subsidiaries in Latin America, and
  3. how would that affect Latin America’s banking systems and financial services markets?

The answers are not all straightforward, but there are a few things at play that will be a force.

Diaz Reus attorneys, Sumeet Chugani and Ricardo Ortiz Gil Lamadrid, explain:

The ongoing financial crisis in Europe and the United States continues to raise red flags for the Latin American branches of multinational banks. Latin American financial institutions anticipate that U.S. and European banks will soon pull back from their international lending activities—causing a substantial decrease in the region’s overall liquidity.

As of June 2011, European banks provided $206 billion in credit lines to their Latin American counterparts—making them the largest providers of external funding to the region. The United States also provides a steady flow of credit lines throughout Latin America. A reduction of foreign credit lines will reduce the supply of dollar funding for exporters and increase the premiums charged by local financial institutions.

Still, local subsidiaries of U.S. and European banks that are well entrenched in Latin American countries and hold a large deposit base and copious amounts of local currency will survive.

The expected pullback of American and European banks may cause local banks in Latin America to adopt a more conservative approach to credit expansion. It also holds the potential for a detrimental impact on exports flowing in and out of the region. The reduction of credit facilities will require Latin American countries to search elsewhere for valuable credit lines. It is a highly probably that this new scenario will give Chinese and Japanese banks new opportunities to further expand their already surging influence in the Latin American region’s financial affairs.

Diaz Reus & Targ is a global law firm offering legal counsel to multinational corporations, governments and individuals.