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

VOX
Research-based policy analysis and commentary from leading economists
Survey measures of the decline in trade credit
According to an unreleased BAFT (Banker's Association for Trade and Finance) survey,
flows of trade finance to developing countries seem to have fallen by some 6% or
more year-on-year – probably more than the reduction in trade flows – hence implying
that the lack of trade financing is indeed an issue for these countries. If such numbers
were to be confirmed (at least local bankers seem to agree on them according to
the survey), that would mean that the market gap could be well over the $25 billion
estimate mentioned above (up to $100 billion, possibly more). The scarcity of trade
finance is very likely to accelerate the slowdown of world trade and output.
Of course, it can be argued that such "exogenous" factors as liquidity squeeze,
exchange rate fluctuations and others impacting risk are not specific to trade finance.
Any unhedged cross-border flow is likely to be affected by exchange rate fluctuations
and increased risk. Likewise, all credit is dampened by the credit crunch. The combination
of scarce liquidity and a re-assessment of customer and country risks resulted
in a sharp increase in the price of credit transactions. Spreads on 90-days letters of
credit have ramped up in the course of 2008 from 10 to 16 basis points on a normal
basis, to 250 to 500 basis for letters of credit issued by emerging and developing
economies. Even under stress, it is hard to believe this sort of loan – which is among
the safest and most self-liquidating form of finance due to strong receivables and marketable
collaterals – could see its price increase by a factor of 10 to 50.
While overall flows cannot be estimated with precision, the overall increase in
spreads requested for opening letters of credit, particularly at times when liquidity
constraint hitting the money market seems to have relaxed a bit, and other factors
point to a mismatch between supply and demand.
Mismatch between supply and demand
Why has this happened? Two arguments are put forward. Public sector actors emphasise
market failure while private sector actors tend to blame the costs associated with
implementing the Basel II rules. 20
The market failure argument relies on the inability of private sector operators to
avoid herd behaviour, especially when the credit risk and country risk are confused
(e.g. amid rumours of sovereign default). Cooperation between global suppliers dries
up during crisis, with the best run ones refusing to off load/refinance in the secondary
markets the positions of banks that are in less favourable liquidity situations, or
carrying excess exposure to trade credit. The failure of private lenders, which account
for an estimated 80% of the trade loan market, to meet the demand for cross-border
trade finance is unusual given the self-liquidating nature of the market (often backed
by strong deliverables, e.g the cargo itself acts as collateral for the loan).
On the regulatory side, commercial bankers have long complained about the
implementation of Basel II rules, which are regarded as having a pro-cyclical effect on
the supply of credit. That is, in poor market conditions, trade finance would be
unfairly treated as capital requirements for it would be significantly increased, particularly
for counterparty risk with developing countries' customers. The system of rat-
20 These arguments are not necessarily new (see WTO 2003, page 6) but at present they may well apply
with even greater force.
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