9 October 2008

Trade Finance Booms Amid Global Crisis

The following is exceprted from the 9 October 2008 edition of “New York Times”.

Business is booming in the trade finance market as exporters and importers return to a tried and tested form of credit amid the chaos of the financial crisis, bankers in the sector say.

Demand for trade finance -- a traditional form of banking dating back to the Middle Ages -- is so strong that some houses say they are turning away business for lack of capacity…

SIMPLE AND TRANSPARENT

Trade finance is the easiest, cheapest and most collateralized form of credit, industry experts say.

In recent years customers were lured away by investment banks and corporate finance departments offering sophisticated products, but now they are flooding back attracted by the simplicity and transparency of trade finance.

International trade amounts to about $14 trillion, World Trade Organization figures show, and 90 percent of these transactions involve credit.

Trade finance takes various forms. An importer's bank can issue a letter of credit to an exporter, which it pays when it receives documents confirming the goods have been shipped.

In another variant an exporter sells its receivables -- or future payments from an importer -- at a discount to a trade house known as a forfaiter.

There is also a secondary market in trade finance instruments but activity there is subdued in the general nervousness around the crisis, bankers say.

Around 60 percent of trade finance is handled by private lenders, ranging from niche boutiques to major banks. These are typically short-term transactions of less than a year, but increasingly these players are lending for five years or more.

Export credit agencies, who concentrate on this longer-term business and are often state-run, handle about 30 percent, and the rest is handled by regional development banks.

"In difficult times, trade finance shows itself to be a tried and tested method of financing," said Kimberly Wiehl, secretary-general of the Berne Union, which groups state and private-sector export credit and investment insurance agencies.

"The trend has been a steady increase in demand, not a huge increase given all the turmoil in September," she told Reuters.

Short-term commitments by Berne Union members rose to $1.02 trillion at the end of June from $901.8 billion at the end of December and $787.9 billion in June 2007, she said.

But against that 29 percent rise over the year, claims for deals that defaulted totaled only $530 million in the first half of this year against $1.0 billion in all of 2007, typical for this stage of the export credit cycle.

WARNING SIGNS

Trade experts say it is still too early to say how the financial turmoil will play out on underlying trade flows. So far these numbers suggest that exporters and importers can get credit when they need it and can meet their liabilities.

This contrasts with the 1997/98 Asia financial crisis, when there was a total interruption of financial transactions for a while in some countries, including trade finance.

"In the Asian crisis for some weeks ships couldn't leave the ports. We're not seeing anything like that," said one expert.

But there are warning signs. On Monday Brazil's government announced it would use its foreign reserves to increase credit lines for exporters who have been finding it increasingly difficult to get finance for trade.

"They were becoming expensive, but many exporters weren't able to find finance at any price," said Paolo Estivallet de Mesquita, a senior diplomat at Brazil's WTO mission.

"There's liquidity access for traditio