World trade is declining this year for the first time since 1982, and by a projected nine percent, according to the World Bank - the steepest plunge since World War II. A large part of this drop has to do with the deep global recession limiting consumer demand in developed countries. But 90 percent of cross-border trade is financed, and World Bank president Robert Zoellick has said the decline in trade credit availability could be responsible for 10 percent to 15 percent of the total drop in trade.
Intergovernmental financial institutions and export credit agencies are working with unusual speed to restore liquidity to this market. The G-20 committed $250 billion in trade finance at its early April meeting; the G-7 finance ministers said they were implementing the initiative later that month.
The Bankers Association for Finance and Trade has held two summits so far this year, bringing together trade finance banks, export credit agencies, multilateral agencies, government ministries, and credit insurers. Out of the first meeting came recommendations for public-private initiatives, the expansion of government risk guarantees, and increases in direct funding.
"We believe the government has to create a secondary market for trade assets," says John Ahearn, global head of trade services and finance at Citigroup. The bank typically sells its trade-based loans into the secondary market, to regional banks and other institutions, and then lends more. But the market dried up due to a lack of liquidity.
The secondary market is "the toughest one" to restore, says BAFT president Donna Alexander, but she points to efforts by the World Bank's International Finance Corp. and the Import-Export Bank of the United States, among others, to unclog the market.
Some liquidity is coming back into the market. "October and November 2008 were really rocky, but by January to mid-February there was some improvement. Maybe we're at 30-35 percent," says Ahearn.
The IFC is seeding the World Bank's Global Trade Liquidity Program with a commitment of $1 billion toward the initiative's $5 billion initial public sector target; China is supporting the program with $1.5 billion, the U.K. government's CDC Group will put in about $445 million, the Canadian government has committed $200 million, and the Dutch will add $50 million. Part of a $1.5-billion trade finance package from the Japan Bank for International Cooperation has also been earmarked for the program. Standard Chartered Bank and Standard Bank of South Africa will receive LOCs of $500 million and $400 million, respectively, as the initial private sector participants.
Georgina Baker, director of financial markets at the IFC, says the liquidity program will be leveraged up to $50 billion. Trade transactions will be limited to "no longer than 270 days, and then we use the funds a minimum of four times," Baker explains. Many loans will be shorter term, so the $50 billion figure is a baseline.
After last October's meltdown, "banks reduced their country exposures" and terms for letters of credit moved out of reach for many market participants, according to John McAdams, chief operating officer and senior vice president of trade finance at Ex-Im Bank. In response, the Ex-Im Bank has created a $2.9-billion letter-of-credit facility for South Korea and has opened or expanded facilities for India, Nigeria, Angola and others, all in an effort to make lenders more comfortable with financing deals in these countries.
The Ex-Im Bank's most innovative initiative is a put option on loans, which was expected to be rolled out in May. The option "allows lenders to transfer a loan to the Ex-Im if they have financing problems, or in the event of a market collapse," McAdams says. It is also urging lenders to "consider using our balance sheet." On a 10-year loan, "they would take 25 percent to our 75 percent. That takes their loan down to two- and-half years, and keeps them in the act." The end result is a "very competitive" blended rate.