World Trade Organisation’s (WTO) director-general Pascal Lamy has concluded that “the market for trade finance has severely deteriorated”. He reached his conclusion following a meeting of international financial institutions and private banks called to discuss measures to address the shortage of credit available to finance trade.
Following the meeting held this week in Geneva, he has called for increased government action, warning that, “If trade finance is not tackled, we run the risk of further exacerbating this downward spiral.”
Adding: “The global slowdown, whether it is called a slowdown in some parts of the world, a slump elsewhere, will last for some time, and will affect all countries.”
In total, 30 people representing 19 international and regional financial institutions attended the meeting. Following a rapid review of the market, the meeting identified a number of key problems, with the main one being the shortage of liquidity to finance trade credits, which with the liquidity gap estimated to be around US$25bn. The other key problem is the general re-assessment of risks caused by the crisis and following slowdown.
Measures presently being taken, or under consideration, include the World Bank and IFC actively looking to triple their financing ceiling on the trade facilitation programme to US$3bn. Export credit agencies (ECAs) have also seen an increase of around 30% in their business over the past 12 months, and a number of national governments have been backing this increase.
Reflecting on this, Lamy reports: “A priority task is to enhance capacity to mitigate the effects of the increased perception of risks, and to provide the market with earmarked liquidity for trade finance.”
He then called for public authorities to allow financial institutions and ECAs to expand their ability to cover risks.
On a medium-term basis, solutions to the gap in liquidity include increasing the level and developing new means of risk-sharing between banks and ECAs, as well improve information sharing, risk assessment and data collection on trade and finance.
Representatives from the following banks attended the meeting in Geneva: ING, HSBC, JPMorgan Chase, Citigroup, Commerzbank, Royal Bank of Scotland, Brazil’s development bank BNDES. Other institutions represented included: The European Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, IFC, Islamic Development Bank, the African Development Bank, African Trade Insurance Agency, IMF, the World Bank (via representative office in Geneva), the Berne Union and the ICC Banking Commission.
The meeting was held after WTO statistics were released on November 5 revealing world trade growth slipped to 6% in 2007, a fall from 8.5% in 2006. This decline was mainly put down to the “deceleration of import demand, mainly in the United States, but also in Europe and Japan.”
In 2007, trade remained strong in developing countries, with regions in Africa, the Middle East, CIS, developing Asia and South and Central America showing sustained growth.