The International Chamber of Commerce (ICC) is calling for “urgent” intervention by G20 governments to increase the availability of trade finance, as concerns grow over widespread insolvencies.

An open letter to the finance ministers of the G20 group of governments says data from the ICC’s global network shows “a worrying increase in the failure rates of SMEs in recent months” as a result of the Covid-19 pandemic.

The problem is particularly acute in developing markets, where more than half of small businesses are understood to be suffering severe cashflow constraints and are at risk of insolvency within the next six months.

The letter says trade finance can act as a “vital lifeline” for smaller businesses, underpinning around 80% of global trade, but evidence is emerging that the supply of trade credit to SMEs is declining as banks become increasingly risk-averse.

“At a minimum, we urge you to commit to a significant scaling of risk guarantee schemes provided by national government agencies and multilateral institutions – ideally coupled with appropriate regulatory interventions to incentivise the provision of trade credit by commercial banks,” it says.

“We also believe there is scope for the G20 to coordinate common-sense interventions to remove the reliance of trade finance instruments on paper-based documents – and, moreover, to facilitate large-scale purchases of trade assets by governments and institutional investors.”

The calls come ahead of the G20 leaders’ summit in Riyadh later this month, and follow a G20 communique in September that said governments “remain gravely concerned with the serious risks posed to all countries, particularly developing and least developed countries”.

An ICC spokesperson tells GTR that governments have already shown awareness of the issues being raised around trade finance, but says the topic “hasn’t received the degree of attention it deserves”.

The letter is signed by Marcus Wallenberg, chair of Stockholm-headquartered banking giant SEB, and Victor Fung, chairman of the Fung Group in Hong Kong.

According to a memo accompanying the letter and addressed to G20 governments, central banks and international financial institutions, the urgency of the ICC’s appeal is brought on by the emergence of “stress signals” across the trade finance market.

The memo, which has not been made public but has been seen by GTR, says such signals “appear to mirror trends that preceded major supply shocks during previous crises”.

Those trends include a withdrawal of banks from markets deemed high-risk – the letter cites bank de-risking from the commodity finance sector in recent months – as well as pricing volatility, a flight to safety and an increase in rejected applications for trade credit insurance.

The impact falls disproportionately on SMEs, it says. Even prior to the pandemic, the ICC says over half of trade finance applications from SMEs were rejected, compared to 7% for multinational companies. The problem is particularly acute for women-owned businesses.

Companies in developing markets are worst affected, with ICC network data showing “53% of small business owners in least developed countries fear their firms will close permanently unless there is a significant improvement in their cashflow position in the next three to six months”.

The chamber has previously warned that as much as US$5tn of trade credit market capacity will be needed to restore trade volumes to 2019 levels, once the pandemic has passed.

The memo makes several recommendations to the G20 group, including significantly scaling up capacity and increasing risk appetite at development banks, allowing them to provide greater liquidity support and countercyclical support for SME transactions.

It says export credit agencies (ECAs) should be “sufficiently capitalised to provide adequate support for short-term trade transactions, with appropriate transactions limits and no artificial restrictions on geographical coverage”.

The ICC also suggests governments enact emergency legal reforms to allow for the use of digital trade documentation, given the difficulties presenting hard copies while Covid-19 containment measures are in place.

SEB’s Wallenberg says: “Based on our experience leading multinational firms through previous economic shocks, we strongly believe that coordinated action to increase the availability and accessibility of trade-related finance could help avert a widespread SME solvency crisis in the coming months – while laying the foundations for a faster recovery from the Covid-19 pandemic.”