Trade Finance during the Great Trade Public Disclosure Authorized Collapse Editors -HDQĥ3LHUUH&KDXIIRXU0DULHP0DORXFKH Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Trade Finance during the Great Trade Collapse Trade Finance during the Great Trade Collapse Jean-Pierre Chauffour and Mariem Malouche Editors © 2011 The International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org All rights reserved 1 2 3 4 14 13 12 11 This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail: [email protected]. ISBN: 978-0-8213-8748-1 eISBN: 978-0-8213-8749-8 DOI: 10.1596/978-0-8213-8748-1 Library of Congress Cataloging-in-Publication Data Chauffour, Jean-Pierre. Trade finance during the great trade collapse / Jean-Pierre Chauffour and Mariem Malouche. p. cm. Includes bibliographical references and index. ISBN 978-0-8213-8748-1 — ISBN 978-0-8213-8749-8 (electronic) 1. Export credit. 2. Exports—Finance. 3. Financial crises. 4. International trade. I. Malouche, Mariem, 1973- II. Title. HG3753.C435 2011 332.7'42—dc22 2011012219 Cover photos: © moodboard/Corbis (Money Rolls); Adobe Image Library (background) Cover design by Tomoko Hirata/World Bank contents Foreword xi Acknowledgments xiii About the Editors and Contributors xv Abbreviations xix Overview1 Section I SPECIFICITY OF TRADE CREDIT AND TRADE FINANCE DURING CRISES 25 1 Trade Credit versus Bank Credit during Financial Crises 27 Inessa Love 2 Firms’ Trade-Financing Decisions during Crises 41 Daniela Fabbri and Anna Maria C. Menichini 3 Interfirm Trade Finance: Pain or Blessing during Financial Crises? 59 Anna Maria C. Menichini 4 Financial Crisis and Supply-Chain Financing 73 Leora Klapper and Douglas Randall Section II TRADE FINANCE DURING THE 2008–09 CRISIS: INNOCENT OR GUILTY? 87 5 Trade Finance in the 2008–09 Financial Crisis: Evidence from IMF and BAFT–IFSA Surveys of Banks 89 Irena Asmundson, Thomas Dorsey, Armine Khachatryan, Ioana Niculcea, and Mika Saito 6 Global Perspectives in the Decline of Trade Finance 117 Jesse Mora and William Powers v vi Contents 7 The Role of Trade Finance in the U.S. Trade Collapse: A Skeptic’s View 133 Andrei A. Levchenko, Logan T. Lewis, and Linda L. Tesar 8 Trade Finance in Africa: A Survey of Firms 149 John Humphrey 9 Financial Crises and African Trade 161 Nicolas Berman and Philippe Martin 10 World Bank Firm and Bank Surveys in 14 Developing Countries, 2009 and 2010 173 Mariem Malouche 11 Private Trade Credit Insurers during the Crisis: The Invisible Banks 199 Koen J. M. van der Veer 12 Trade Finance in the Recovery of Trade Relations after Banking Crises 213 Cosimo Beverelli, Madina Kukenova, and Nadia Rocha Section III UNDERPINNINGS OF TRADE FINANCE INTERVENTION DURING FINANCIAL CRISES 233 13 The Theoretical Case for Trade Finance in a Liquidity Crisis 235 Tore Ellingsen and Jonas Vlachos 14 Why Boosting the Availability of Trade Finance Became a Priority during the 2008–09 Crisis 245 Jean-Jacques Hallaert 15 Market Adjustment versus Market Failure 257 Jean-Pierre Chauffour and Thomas Farole 16 Should Developing Countries Establish Export Credit Agencies? 273 Jean-Pierre Chauffour, Christian Saborowski, and Ahmet I. Soylemezoglu Section IV INSTITUTIONAL TRADE FINANCE SUPPORT DURING THE 2008–09 FINANCIAL CRISIS 287 17 World Trade Organization Response to the Crisis: A Convening Power to Boost the Availability of Trade Finance 289 Marc Auboin Contents vii 18 The World Bank Group’s Response to the Crisis: Expanded Capacity for Unfunded and Funded Support for Trade with Emerging Markets 301 Bonnie Galat and Hyung Ahn 19 Regional Development Banks’ Response to the Crisis: Scaling Up the Trade Finance Facilities 319 Rudolf Putz, Ghazi Ben Ahmed, Steven Beck, and Daniela Carrera 20 Credit Insurance in Support of International Trade: Observations throughout the Crisis 337 Fabrice Morel 21 Business Responding to the Financial Crisis: Setting Up a Policy Agenda for Trade Finance 357 Thierry J. Senechal 22 Private Bankers’ Response to the Crisis: Warnings about Changes to Basel Regulatory Treatment of Trade Finance 373 Donna K. Alexander, Tan Kah Chye, Adnan Ghani, and Jean-François Lambert 23 Trade Finance under the Current Basel Regulatory Framework: What are the Issues? 385 Marc Auboin Index 393 viii Contents Boxes 5.1 The IMF/BAFT-IFSA and Other Bank Surveys 97 5.2 Key Findings and Observations from the Fifth Trade Finance Survey 114 6.1 Common Types of Trade Finance and the Risk for Exporters 119 10.1 Policy Update on Selected Countries and Multilateral Initiatives 189 19.1 Terms and Conditions of TFI Credit Products 325 19.2 IDB Trade Financing Increases Intraregional Transactions 330 20.1 Credit Insurance and How It Works 338 20.2 The Berne Union 354 Figures O.1 Trade Fluctuations by Region, 2007–102 O.2 Trade Finance Arrangements, by Market Share4 2.1 Regime where the Incentive Motive Dominates 49 2.2 Regime where the Liquidation Motive Dominates 51 2.3 Trade Credit Intensity, Wealth, and Creditor Protection 53 2.4 Input Tangibility, Wealth, and Creditor Protection 54 4.1 Extension of Trade Credit, by Country 75 4.2 Changes in the Extension of Trade Credit, by Country 76 4.3 Access to Bank and Supplier Financing, by Country 78 4.4 Trade Credit and Liquidity 83 5.1 Trade Finance Arrangements, by Market Share 90 5.2 Merchandise Trade Index, 2007 to mid-2010 92 5.3 Global Funding Pressure, 2008 to mid-2010 93 5.4 Three-Month LIBOR Spreads in Advanced Markets 94 5.5 External Debt Market Spreads in Emerging Markets, 2008 to mid-2010 95 5.6 Loans to Nonfinancial Firms in the Euro Area and U.S., 2007 to mid-2010 95 5.7 U.S. Commercial Paper: Outstanding Accounts, 2008 to mid-2010 96 5.8 Overall Changes in Merchandise Exports and Trade Finance 100 5.9 Changes in Merchandise Exports and Trade Finance, by Country Group 101 5.10 Estimated Composition of the Trade Finance Industry 102 5.11 Overall Change in Trade-Related Lending Guidelines, Q4 CY09 vs. Q4 CY08 104 5.12 Ability to Satisfy “All Customer Needs” 106 5.13 Effect of “Recent Developments” on Pricing of Trade Instruments 110 5.14 Change in Trade Instrument Pricing 111 5.15 Change in Probability of Default, 2007–09 113 Contents ix 6.1 Tightening Domestic Loan Standards 120 6.2 Domestic Commercial Lending 121 6.3 Global Merchandise Exports 121 6.4 Global Cross-Border Banking Activity 123 6.5 Short-Term Financing Received 123 6.6 Export Credit Insurance Exposure 125 6.7 Trade Financing Debt, by Country 126 6.8 Relative Declines in Exports, Export Insurance Exposure, and Trade Finance Debt, by Region, Q2 FY08 to Q2 FY09 126 9.1 African Exports after Financial Crisis in Partner Country 167 9.2 African Exports after Financial Crisis 169 10.1 Export and Import Growth in Surveyed Countries 175 10.2 Postcrisis Export Growth and Constraints among Surveyed Firms 176 10.3 New Market Exploration in Developing Countries 177 10.4 Severity of Export Constraints due to 2008–09 Crisis, by Country 179 10.5 Sources of Export Market Constraints 180 10.6 Trade Finance Changes and Effects on Export Firms 181 10.7 Constraints on Bank-Intermediated Trade Finance, by Country 182 10.8 Export and Import Trade Finance, India and South Africa 184 10.9 Export and Import Trade Finance, Ghana and Kenya 186 10.10 Export and Import Trade Finance in Turkey, by Instrument 187 10A.1 Export and Import Growth, by Country 194 11.1 How Private Trade Credit Insurance Works 202 12.1 Survival of Trade Relations after Banking Crises 217 12.2 Recovery of Trade Relations, by Experience Level 220 12.3 Recovery of Trade Relations, by Size 221 12.4 Experience, Trade Credit Dependence, and Recovery of Trade Relations 222 12.5 Size, Trade Credit Dependence, and Recovery of Trade Relations 223 16.1 World Trade and Trade Insurance Volumes 275 16.2 Medium- to Long-Term Export Credit Insurance 277 18.1 Number of GTFP-Covered Banks in Emerging Markets, by Region 304 18.2 Shares of GTFP-Issued Guarantees in 2010, by Region 305 18.3 GTLP Supply-Demand Overview 314 19A.1 TFFP Transactions since 2005, by Number