The collapse of global trade, murky protectionism, and the crisis:

15. Restoring trade finance: what the G20
can do
Marc Auboin
WTO Secretariat
Shrinking trade finance threatens living standards in both industrialised and developing
countries. It reduces trade flows and thus adds to other deflationary pressures.
The threat is all the greater in this crisis because international supply chains now
extend to trade finance as well the production of parts and components.
Sophisticated supply-chain financing operations – including for small and mediumsize
companies – rely on a high-level of trust among suppliers; trust that they will
deliver their share of the value-added and have the necessary finance to produce and
export in a timely manner.
What is the situation now?
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.
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