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TRADE FINANCE

Supply of trade finance

Part of the collapse of world trade, as of mid-2009, is due to problems with trade credit financing. Since statistics on this are scarce, it is impossible to be precise about the most immediately salient and challenging feature of the financial crisis from a trade perspective — the supply of trade finance.


 


The global liquidity situation has been a major constraint in 2008 on the largest suppliers of trade finance. Trade credit has also been reduced by a general re-assessment of counter-party risk, and an increase in the expected payment defaults on trade operations. In the second half of 2008, the situation spread to developing country markets. The market gap initially appeared in Wall Street and London, as US and UK global banks — particularly those with weak balance sheets — could not off-load/refinance on their excess exposure in trade credits the secondary market. As a result, some banks were unable to meet the demand from their customers for new trade operations, leaving a “market gap” estimated to be around $25 billion in November 2008 — out of a global market for trade finance estimated at some $10 trillion a year. More disturbing is the fact that large banks have reported on several occasions that the lack of financing capacity has made them unable to finance trade operations. Some very large banks used to roll-over up to $20 billion in the secondary market per months are doing $200 million right now due to lack of counterparties. Demand for trade credit is far from being satisfied, and prices for opening letters of credit far outweigh the normal re-assessment of risk according to market specialists. Further, the liquidity problem, although cooling a bit in Asia, has since spread to other developing countries’ money markets in South Asia, Africa, and Latin America. This adds to the problems faced by local banks in certain developing countries even in normal circumstances such as lack of deep money markets, lack of capacity to handle large volumes of trade credit, lack of reliable information on the creditworthiness of customers, all of which lead, in periods of crisis, to difficulties in finding partners in developed countries to accept the counterparty risk.

The efforts by public players to boost the supply of trade finance

One clear lesson from the 1997/98 Asian financial crisis is that in periods that are prone to a lack of trust and transparency, all actors — including private banks (which account for some 80% of the trade finance market), export credit agencies and regional development banks — should as far as practicable pool their resources (IMF 2003). Strong links among the various players are also important because of an absence of comprehensive and reliable data on trade finance flows. This means that the main channel for making a reasonable assessment of the market situation is via the collection of informed views and partial statistics from various institutions. This has been a key aspect of the activities of the WTO Expert Group.