European banks may withdraw their funding from global markets including Hong Kong because of the European debt crisis, warned Secretary for Financial Services and the Treasury Professor Chan Ka-keung.
Chan said that while banks in Hong Kong did not have big holdings of European sovereign debt, the impact of the crisis on them related to the funding issue.
'European lenders may well need to scale down their lending or investments in other markets. This is to meet the funding need of their home markets as well as the higher capital requirement under the new regulations introduced after the financial crisis,' he said.
The European crisis came under the spotlight yesterday after Standard & Poor's placed 15 euro-area nations including Germany and France on watch for potential rating downgrades, sending shock waves through the markets including Hong Kong. This came as euro-zone leaders planned a summit in an attempt to find a solution to the debt crisis.
Chan said the crisis would continue to cause fluctuations in investment markets but he did not believe the euro would collapse.
'The downgrade of S&P is not a big surprise as we know the problem already. The impact of the downgrade will be modest on Hong Kong markets. I also believe the euro will survive,'' he said.
'If the euro does break down, it would seriously hurt the economies of Europe. There would be a very long period of recession in Europe. I do not think European leaders would take such risks.'
Chan said European leaders had got closer to reaching a consensus on rescuing the euro and restoring the economy.
He said euro-zone countries would need to reform their pension schemes and employees would be expected to work longer before getting their retirement funds. Governments would need to cut their budget deficits but would have to keep short-term funding costs low.
Chan said the Hong Kong Monetary Authority had kept a close eye on the situation and required banks to make sure their systems could cope with market fluctuations.
Mark Konyn, the chief executive of RCM Asia-Pacific, said the S&P downgrade was not a surprise.
'The S&P downgrade confirms what markets have been pricing for a while and is indicative of likely underlying economic weakness and the intense struggle to resolve the crisis and sustain the integrity of the single currency,' Konyn said.
Regarding the future of the euro, he said negotiations over the single currency had entered a critical phase.