A fragile union

The results of the Greek elections have given the eurozone some breathing space, but the crisis continues to cause a shortfall in funding and risk capacity for trade and supply chain finance. Rebecca Spong reports.


Following the June 17 elections, the likelihood that Greece will leave the eurozone has lessened, at least momentarily. The centre right New Democracy party has formed a coalition government that seems set on pushing through the austerity requirements as demanded by the European Union and the International Monetary Fund (IMF).

But uncertainty remains. Less than a week after the election results, 15 of the world’s biggest banks were downgraded by rating agency Moody’s. Bank of America Corporation, Barclays, BNP Paribas, Citi, Crédit Suisse, Crédit Agricole, Deutsche Bank, HSBC, JP Morgan Chase, Morgan Stanley, Royal Bank of Canada, Bank of America Merrill Lynch, RBS, Société Générale, and UBS were all downgraded by between one to three notches.

These downgrades will only place greater pressure on banks’ borrowing costs.

Then just a few days later Spain formally requested a bail-out of up to €100bn from its fellow eurozone members to recapitalise its domestic banks. The downward spiral in confidence in the wider European banking sector continues to affect funding costs and appetite to lend within the trade, commodity and supply chain finance markets.

Joaquin Jimenez Krijgsman, global head, supply chain finance, working capital solutions, ING, has witnessed this decline in lending capacity: “With banks facing a scarcity of funds and increased capital requirements for their business, they will have to take measures.

For some banks this means shrinking in size and for other banks this means rationalising processes, cost-cutting and raising capital internally to sufficiently be able to sustain activities. “ING is able to maintain balance sheets and commitments in lending, whereas other banks will have to shrink and they will reduce their funding and lending to customers.”

In terms of distributing trade finance risk in the secondary market, there is also a continued sense of unease. “I feel there is still quite a bit of panic and because of the uncertainty everybody is focusing on the same risks,” comments Silja Calac, head, trade risk management, forfaiting and financial institutions, UniCredit.

Everyone is focusing on China as Asia is seen as good risk but Central and Eastern Europe is more affected by what is going on in Europe so the secondary market is much more cautious regarding these risks,” she observes. It is not just the banks that are jittery about the deteriorating eurozone, trade credit insurers are also taking a cautious approach to writing new cover.

In June, just ahead of the Greek election results, German export insurer Euler Hermes revealed it had cut cover to Greece, although it is keeping existing policies in place. This announcement was quickly followed by statements from fellow insurers with Coface confirming they too wouldn’t cover any further Greek risk, while Atradius stated they were monitoring the situation carefully. Exporters are also observing a tightening in the supply of trade finance.

A survey released at the end of May by the World Economic Forum (WEF) reports that access to trade finance is the second most problematic factor impeding businesses looking to export.

Data released by the ICC at the end of May in its global survey on trade finance finds that a rising proportion of survey respondents said their trade credit lines for corporates decreased in 2011 compared to the previous year. A total of 15% reported a decrease in 2011 compared to 12% in 2010. Similarly, a rising proportion of respondents stated that their credit lines for financial institutions declined in 2011.

Swift data for the first quarter of 2012 reflects a decline in trade finance activity. Overall volumes only fell by minus 1.61%, a fall in line with seasonal trends, according to Swift. However, the eurozone specifically saw a more noticeable decline of minus 15.17% in trade finance traffic volumes, a figure that represents 9% of total global documentary credits.


With the continual downgrading of banks and countries, mitigating counterparty risks of other banks when financing international trade deals has become a concern.

It is causing specific problems when banks look to distributing trade risk on an unfunded basis. Not only are there issues with bank funding, but it seems risk capacity is also limited.

If banks sell trade deals on an unfunded basis to somebody, they need a counterparty limit. But there are some countries where a bank might have put its credit activity on hold.

This means the bank’s secondary market limits are also on hold, so the bank can’t sell unfunded deals to partners in these countries. Even if a bank hasn’t put credit limits on hold, the rating of the partner bank is crucial in order to reduce the risk-weighted assets (RWA) the bank carries.

“If I get mitigation through risk participation from a client who has a rating which is worse than the obligor, the risk cover no longer makes sense, as it will increase RWA while reducing gross revenues,” notes Calac.

Yet, these counterparty risks are not necessarily the biggest problem for trade finance. “We are working with emerging market risks and most of these risks still have lower ratings than the risks of my counterparts, and most of my counterparts are not Greek or Portuguese, they are in Germany, Switzerland, Holland or the UK and these banks still have investment grade ratings,” Calac adds.

Despite some concerns surrounding unfunded business, from the corporate clients’ point of view, it is the cost of the funded trade business that continues to give them a headache. “For the funded business the problem is that the pricing of course is higher,” remarks Calac, partly due to the fact that European banks are paying additional costs for US dollar funding.

“So if you have, for instance, Turkey risk participation on an unfunded basis in an LC, you will still be able to get pricing slightly above 1%. While when you want to do a funded transaction in Turkey for the same tenor, you will definitely be above 2%. So you see the pricing can even double if you do something on a funded basis,” she adds.


Cost of financing is not the only issue corporates are grappling with. There is increased political risk in many regions across the globe as well problems related to non-payment issues. Banks are seeing this economic environment as a key driver of interest in supply chain finance (SCF) programmes. Such schemes were originally promoted as a means for large multinational companies to better manage their working capital, but they are now being promoted as a means to help larger companies keep their smaller suppliers in business by ensuring early payment on invoices.

“Where there are suppliers in that supply chain which may not have as good a credit rating as some of their buyers, they might have difficulty obtaining finance if they continued trading on an open account basis,” explains Louis Robinson, managing director, Emea trade and network origination head, at RBS.

“What you find is that since the crisis the banks and partners are being approached more, so banks are able to finance those suppliers and continue to maintain that trade,” he adds. Alexander Mutter, head of trade and cash solutions advisory, Emea at Deutsche Bank observes heightened interest in SCF. “Indeed we see continuously increasing demand for financial supply chain solutions. The stability of the supply chain and mitigation of counterparty risk is a key objective,” he notes.


Although the current environment provides a perfect opportunity for SCF products to really gain a foothold in the market, the obstacle in its path is the required level of liquidity needed to support large-scale programmes. There is a need for banks to pool their resources to win deals, bringing together those banks with the risk capacity and client relationships together with those financial institutions that actually have the required financing to support the deals.

“I think there is sufficient liquidity but only with certain banks, so there are some banks in southern Europe who are having issues with liquidity. We work with some of our financial institutions in southern Europe, which may be able to cover risk but not able to cover liquidity. So it would be up to the more global banks, like ourselves, to assist in the liquidity on transactions,” explains Robinson. Deutsche Bank’s Mutter adds that SCF is well-positioned to attract new players to provide financing.

“Supply chain finance solutions are, by the nature of their structure, self-liquidating and free of any dilution risk. It is, therefore, one of the most attractive financings for banks and other investors. We still see high interest from banks as well in the secondary market to offer liquidity at attractive rates,” he notes.

From the corporate client perspective, they are looking to widen their banking group and pool of available liquidity in order to reduce their counterparty risks.

Given the frequent bank downgrades, no company wants to be left without an adequate source of financing. “We prefer to bank with a good number of our Philips relationship banks as they are and have been our reliable partners in business for many years,” explains Pieterbas Kist, senior business finance manager Emea, corporate treasury, Philips, based in Amsterdam.

“If you rely on just one or two, and they enter difficult times, they might have to make choices on where to focus their activities. “An additional benefit of working with several relationship banks is that we can work with the best-in-class for different areas of business as each bank will have its focus areas, in terms of products as well as geographies,” he adds.

From the banks’ perspective, they are pleased that corporates are looking to a wider range of financing providers. Robinson at RBS observes: “We’ve had situations where we bid for some business with another bank and then the corporate will come back and say well actually we are going to award this to two or three banks because we want to diversify our risk.

Go back a few years that was pretty unheard of and you as a bank might have been pretty upset, but now you are quite pleased.” It isn’t only SCF products that are catching the corporate’s eye, insurance is another much contemplated option.

“Certainly with eurozone crisis, banks or companies are looking for insurance to support transactions and it is part now of their business process and not their last thought,” observes Rupert Cutler, managing director at insurance firm Newman, Martin and Buchan. Furthermore, Cutler has observed a shift in the types of risk he is being asked to cover. “We are seeing more requests for cover from developed markets in Europe and not just from the fringe emerging markets,” he notes.


Despite the shortfall in trade finance funding and risk capacity, many argue that the main problem afflicting the market is lack of underlying demand. Companies are not investing in capex expenditures; exporters are not seeing increased orders and are reluctant to expand into new markets. These all translate into less trade finance deals being originated. Statistics from the World Bank suggest that 2012 will see a fall in international trade. The report predicts that growth in world trade will slow to 3.7% in 2012, following 5% growth in 2011 and a far more buoyant 13.8% growth in 2010.

Speaking to GTR back in late May about the UK economy, Tan Kah Chye, global head of trade and working capital at Barclays Bank said that banks are ready to lend trade finance to both small and medium-sized companies and the larger corporate exporters, but the demand is dwindling due to the underlying economic slowdown.

“We [the industry] extended out more credit limits than before. The issue is lack of demand. Our utilisation rate is not moving,” he stated. More worryingly, the economic malaise in the eurozone is starting to hamper growth in many developing countries; target markets for trade finance bankers.

A new report from the Overseas Development Institute (ODI) released in mid-June warns that the eurozone crisis will spread into the emerging markets due to depleted trade volumes and could potentially cause a cumulative output loss of US$238bn over the course of 2012-13 in the developing world, affecting the poorest countries the most. It is evident that the eurozone crisis is far from contained within the geographic boundaries of the continent, and it is vital for the growth of international trade and trade finance that the fragile post-election European Union is strengthened. GTR


In late June Spain formally requested a bail-out for its beleaguered domestic banking sector.

Eurozone countries are set to lend up to €100bn to the Southern European nation. Ratings agency Moody’s then announced the downgrade by one to four notches of the long-term debt and deposit ratings for 28 Spanish banks. Moody’s said the downgrades reflected the weakening of the Spanish government’s creditworthiness, which implies a weaker credit profile for Spanish banks.

However, Spain’s larger and more internationally focused banks, BBVA and Santander, are better-positioned to weather problems afflicting the Spanish domestic economy and banking sector.

Both Banco Santander and Santander Consumer Finance are rated one notch higher than the sovereign’s rating, due to the high degree of geographical diversification of their balance sheets and income sources. BBVA also benefits from a diversified portfolio of business. Indeed for the first quarter of 2012, the bank only generated 16% of its profits from Spain, whereas 26% of its profits came from Latin America and 30% from Mexico.

Carlos Milans del Bosch, global head of structured finance at BBVA, looks after the bank’s structured trade finance (STF) business. He tells GTR that due to the Latin American focus of the STF business line, the deal pipeline remains strong. “Despite the widespread tightening of lending conditions, BBVA is still closing deals that benefit from the current repricing trend,” he notes. “Deals are taking longer to structure and close but we are still open for business and have around 30 mandates in Latin America, both in project and trade finance.”

Watch the video: Europe’s uncertain future