"Financial crisis wake-up call"- Pascal Lamy, WTO

13 Nov '08

9 min read

One is a shortage of liquidity to finance trade credits. The second is a general re-assessment of risks caused as much by the financial crisis as by the slowing down of the world economy. These problems are being felt most acutely by traders and banks in the emerging market economies.

The view expressed this morning by the trade finance practitioners is that the situation is likely to deteriorate further in the months to come.

Some of these difficulties were becoming apparent even in April when I chaired the last meeting of this group of trade finance experts. Consequently, there are already some steps being taken to respond to the situation. Let me draw your attention in particular to the announcement earlier this week by the President of the World Bank, Robert Zoellick, that he intends to propose to the Executive Board of the World Bank/IFC a tripling of the ceiling, to $3 billion, of the trade finance guarantees available under the IFC's trade finance facilitation programme.

This is a remarkable example of quick reaction by an IFI to current market developments and demand, and of Aid for Trade in action. The Berne Union has also informed us that export credit agencies have been stepping in much more actively in recent months. Collectively, they have increased their business by more than 30 per cent in the last 12 months, with an acceleration since the summer. We had confirmation that this increase in activity is being backed by some national governments, for example Germany, Hong Kong China, and Japan.

The message from some other regional development banks with similar programmes to that of the World Bank/IFC is that they too could do much more to respond in the market if their Executive Boards would also raise their ceilings on this kind of financing activity. Here is a clear message for WTO members – contact your finance and development officials who represent you on the Boards of the Regional Development Banks to promote their greater involvement in trade finance activities, as a lifeline for their economic activity.

What still needs to be done?

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. From that point of view, both the international financial institutions and the export credit agencies have the possibility to expand their contributions to cover risk and provide additional liquidity under existing instruments. But this will not happen without public authorities stepping in to provide them with more support.

The market currently estimates the liquidity gap in trade finance at about $25 billion. This is a sizeable sum, but not enormous relative to the amounts that central banks have found it necessary to inject into financial and banking markets in the past couple of months. The private banks believe that this gap could be filled reasonablycomfortably through increased co-sharing partnerships with international financial institutions and export credit agencies to the extent that the trade finance and insurance programmes of these institutions are supported by their shareholders, which of course is you, the member governments.

More Textiles News - Switzerland...