Erika Morphy looks at whether the initiatives taken by various multilaterals during the last months of 2008 to pump much-needed liquidity back into the market have taken effect.
Has the estimated US$25bn gap in the trade finance market been plugged yet?
The maths at least works: US$38bn plus US$6bn or so, minus US$25bn, and voilà: the global trade finance marketplace is back in business, if not liquid then at least operating.
These numbers should be familiar, even if the conclusion is not – at least not yet. In November last year, during a global meeting to discuss the ongoing crisis in the world trade finance market, WTO director general Pascal Lamy said that the current liquidity gap in trade finance that had developed over the previous few months stood at about US$25bn.
By that point, the trade finance community hardly needed the WTO to quantify what had become apparent: the worsening US economy had suddenly spiralled into a global crisis, putting even the most secure forms of finance at risk. But Lamy’s tangible US$25bn at least put the individual banks’ troubles into a larger context.
A US$38bn boost
Less than three weeks later, at the beginning of December, the United States and China decided to act jointly and inject some liquidity into the trade finance system. Specifically, the United States Export-Import Bank agreed to provide US$12bn in finance facilities; the Export-Import Bank of China said it would contribute US$8bn. Because this is short-term financing and the banks will be recycling the funds, the aggregate amount of new support, the two countries said in a joint announcement, would be US$38bn.
Other agencies are also riding to the rescue. The International Finance Corporation (IFC) is asking its board of directors to double its trade finance facility to better support the growing requests. In addition to IFC’s global trade finance programme, the World Bank is expanding its trade facilitation services, establishing its own trade facilitation facility for low-income countries.
There are also other multilateral proposals floating about that could conceivably inject another US$6bn of global trade finance support, one source tells GTR.
Additional measures include an agreement among the OECD nation export credit agencies to expand trade finance. At November’s Asia-Pacific Economic Cooperation Summit in Peru, member countries promised to form a pan-Pacific network of export agencies to improve trade finance – with Japan’s export credit agency serving as the clearinghouse.
Then there are all the steps individual countries are taking to stem the bleeding.
Brazil, just to give one example, sold US$2bn of repurchase agreements to increase trade finance lines. South Korea, to give another, has been taking steps to make dollar financing more available to local firms. The day before New Year’s Eve 2008, the Bank of Korea (BOK) announced it would ease rules on foreign currency loans for local large exporters. Specifically, it is earmarking US$10bn for local large exporters in foreign currency loans. Banks will not be required to put up collateral as BOK has traditionally required for foreign currency loans. This measure is scheduled to end in December 2009. In November 2008, BOK rolled out a plan to offer US$16bn to ease dollar shortages among local exporters.
With all this money in the system or about to be injected into the system, along with the coordinated interest rate cuts the global central banks have made for the last few months and the numerous bank bailouts on both sides of the Atlantic, the global finance system should be moving back to liquidity – or at the very least out of its months-long paralysis.
As yet, that has yet to happen, at least with any noticeable momentum. Bankers are turning down once-plum deals – Russian steel for instance, with a spread of 300 points – because they do not trust the counterparties and/or they do not have the capacity. Conversely the former darlings of the trade finance community – Russian oil and gas companies (even Gazprom) – are floundering as they find credit lines harder and more expensive to secure.
Why haven’t any of the measures put in place begun to work? And more importantly – will they ever?
The ‘why’ is easy. For starters, there is no doubt a larger financing gap than the US$25bn Lamy identified.
“The trade finance system is very non-transparent,” comments Bernard Hoekman, head of the World Bank’s trade group. “It is unclear where the restraints are and how these show up in pricing and volume.”
He totes up the many initiatives underway, pointing to the IFC’s doubling of its trade finance programme as an illustration of how aggressive and innovative agencies are being in combating the crisis. The IFC, Hoekman reports, is apparently also trying to leverage that money further by encouraging the types of deals struck between the US and China so that governments can do even more to provide guarantees for trade finance. “So it’s fair to say there is a general recognition that there is a severe problem and a great need to put in place instruments to alleviate the pressure,” he says. “But it is also fair to say that we don’t have good, real time and comprehensive information on how bad the constraints are and if any of these measures are having a positive impact.”
Compounding that issue, he continues, is the sudden emergence of a severe global recession. “A company could have access to trade finance but may not be buying. What we have now is a demand shock and a financial crisis – and the two are interrelated and amplifying one another.”
Indeed, many of the measures put in place are in fact working – just not as well as anticipated. So instead of boosting growth or jumpstarting lending, these billion-plus dollar solutions are merely preventing an even worse scenario from unfolding, suggests Bonnie Galat, the IFC’s head of marketing and sales for the global trade finance division.
For instance, Galat says, demand for assistance from the trade finance facilitation programme has been unprecedented – and is coming from sources not accustomed to approaching the IFC. “We have had inquiries not only from existing banks in the programme – and at levels far above what we have previously seen – but also from banks that up until now have not needed the programme. They have had sufficient credit lines without the risk mitigation provided by the IFC.” These banks are in countries – higher rated countries but not necessarily investment-grade – that are not participating in the programme; they are also banks in participating countries but higher tier institutions, she says.
The next steps
Given all that has been thrown at this monster of a financial crisis – and the little impact that that has had – the conversation in policy-making circles has turned to even more aggressive proposals.
Multilaterals are exploring such concepts as developing a pooled liquidity structure for banks that need trade finance support, one source says. “This would approach the problem in a more wholesale fashion than the current approach, which is very much transaction-by-transaction oriented,” the source comments.
Some in the community started thinking along these lines in September-October, when the US Treasury decided to partially nationalise the US banking system by injecting US$250bn of capital in several banks. Originally it had planned to purchase toxic mortgage-backed debt from investment banks and other financial institutions that could not pass these bloated securities onto the secondary market. Treasury, to be sure, has been pelted with criticism for its handling of the crisis, starting with allowing Lehman Brothers to fail in September. It has also changed the direction of the bailout several times since the fall, confusing an already wary market. Its move to support banks instead of transactions, though, has been deemed a cautious success – save for, of course, those banks that had been looking for a buyer upon which to unload the securities.
There are many details to work out says GTR’s source, who works for such an institution. Indeed, these institutions are hoping to avoid some of the earliest mistakes made in the US and Europe by the financial communities and government agencies. “Like all of the economic policy-makers around the world we are disadvantaged because we are dealing with something the world economy has never seen before. It is obvious, though, that the old measures and prescriptions will not work – or they will not work enough to reverse the tide.”