Once the near-term recapitalisation needs of euro area banking systems are taken into account, the contrast between developing Europe and the other three emerging market regions becomes even starker. More precisely, the index, which has a value of 41.8 for emerging Europe, suggests that the credit dependence of that part of the world on euro area banking systems that are currently experiencing capital shortfalls is more than four times greater than that of Latin America and the Caribbean, which is the second most dependent region according to the index (9.6). The values of the index for Africa and the Middle East and Asia-Pacific are much lower (4.8 and 0.5, respectively).

There are several factors that may mitigate the potential impact of euro area banks' deleveraging on emerging Europe. First, only a third of all euro area banks' lending to the region is accounted for by cross-border claims (third column of Table A). The rest is in the form of locally booked claims, which, as discussed in Box 1, tend to be much more stable. Second, the share of euro area banks' claims on emerging Europe with a maturity of less than one year (33%) is significantly lower than the respective shares in the other three emerging market regions (fourth column). Finally, banks located in the euro area hold only about a tenth of their total international claims on emerging Europe in the form of tradable debt instruments (fifth column). As a result, it would be relatively difficult for them to quickly and costlessly dispose of most of their claims on the region.

Eoin Treacy's view In the last quarter of 2011, a number of reports were issued by Asian analysts speculating on the negative impact for the region of Eurozone deleveraging. The above report suggests that Asia is the least dependent region on Eurozone credit. This is at least in part reflected by the relative outperformance of a number of ASEAN markets compared to those in Europe.

The Dow Jones Euro Stoxx Banks Index remains under pressure and the case for recapitalisation and/or rationalisation of various European national banking sectors remains compelling. Eurozone banks are hoarding cash in an effort to strengthen their respective balance sheets. While they may not quickly be able to withdraw credit from Eastern Europe, they are unlikely to greatly increase lending to the region.

Hungary has been hitting headlines of late as it seeks support from the IMF. The Forint has declined steadily against both the Euro and Swiss Franc which should help enhance competitiveness but has been a headwind for those with foreign currency mortgages. The BUX Index broke downwards from a Type-3 top in August and at least steadied near 15,000. It will need to hold a move above the 200-day MA, currently near 19,000, to begin to suggest a return to medium-term demand dominance.

Turkey's ISE National 100 Index has returned to test the August and November lows near 50,000. A clear upward dynamic, held for more than a day or two will be needed to check current scope for further downside. This article from Bloomberg may also be of interest.

The Polish WIG Index has also returned to test its lows and will need to sustain a move above the psychological 40,000 to begin to suggest a return to demand dominance. The Romanian BET 10 Index will need to sustain a move 5000 to question the medium-term downward bias.