Bureaucracy is just one of the obstacles preventing the effective use of the G-20 trade finance support package launched earlier this year, according to a report issued by the World Trade Organisation (WTO).
In April at the G-20 summit, governments, banks and multilaterals pledged to pump US$250bn into the trade finance markets to revive slowing rates of global trade.
However, doubts were raised at a recent WTO meeting that while this financing package had increased market capacity, the additional capacity provided by multilaterals had not been fully utilised. Commercial banks argued that this was due to the “procedures in place, the distribution of risk sharing, a lack of flexibility and at times red tape”.
The meeting was called by WTO director general Pascal Lamy in order to assess the problems linked to the reduction of trade finance in the market since the financial crisis hit the global economy last year.
Around 35 experts from commercial banks, development banks, multilaterals, the association for export credit and investment insurance, UK and US treasury departments, and the International Chamber of Commerce, attended the meeting.
It was also argued that the “rigidity" of the Basel II rules was preventing banks from fully reaping the benefits of the G-20 financing facility. Banks stated that the little progress had been made in convincing the regulators to either waive the strict tenure requirement imposed on trade finance or to recognise the self-liquidating character of short-term trade finance.
However, the prevailing opinion was that market conditions were improving, with both primary and secondary markets showing signs of stabilisation. Prices, which had rocketed to unprecedented levels in the first half of the year, have started to decline as liquidity began to return to the market.
The probability of default of bank customers has also helped make trade finance attractive, particularly compared to other kinds of lending.
China was highlighted as an important factor in increasing competition and reducing spreads. China has made significant purchases of commodities that have boosted the market, and the destocking process in Asia and in the developed world has stopped, which is again favourable to trade finance. Brazil and India were also pinpointed as countries seeing signs of revival.
However, there are still regions causing concern for the trade finance market. Ukraine and Kazakhstan were named as trouble spots, with a high level of perceived risk, mainly due to bank defaults that could have “systemic repercussions in trade finance markets”.
Low-income countries in south-east Asia and Central Asia, as well as Africa and Central American countries are still grappling with a lack of liquidity.
The activities of export credit agencies (ECAs) were also discussed, and it was noted that while ECAs were stepping in to fill the gap left by the private trade credit insurers, the amount of claims was rising sharply.
Non-OECD ECAs are now playing an increasingly important role. Fees plus spreads on ECA deals range anywhere from 200 basis points to 400 basis points over Libor.
Lamy concluded the meeting by stressing the importance of the G-20 pledged funds, and stated he would write to additional financial institutions to get them involved in the trade finance initiative. He also plans to act at a political level and remind world leaders of their unfulfilled G-20 commitments.
In order to tackle the constrictions of Basel II on trade, Lamy pledged to work towards developing a more “scientific approach” in collecting trade finance data that can demonstrate the low risk nature of this asset class.
The WTO meeting took place ahead of the G-20 summit being held in Pittsburgh.
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