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Trade Finance during the Crisis

The conjecture in the aftermath of the crisis was that the tightening of credit to firms had depressed the intensive margin of exports (how much each firm can export), especially in the sectors more exposed to financial shocks arising from the financial crisis because they tend to rely more on external finance. For example, several studies have shown that industries such as drugs and pharmaceuticals or plastic and computing tend to use much more external finance than industries such as tobacco or pottery.

There is consensus among economists that the financial crisis led to tightened financial conditions. How much of these tightened credit conditions is specifically reflected in trade finance is difficult to assess because of the absence of data. However, a survey jointly administered by the International Monetary Fund and the BAFT-IFSA provides some insight.9 According to a recent IMF study of this survey's confidential data, changes in trade finance conditions were particularly pronounced among large banks that suffered most from the financial crisis and, consequently, were in greater need to quickly deleverage.10 The survey also shows that, at the same time, banks increased the cost of borrowers. The IMF/BAFT-IFSA Trade Finance Survey provides evidence that, particularly in the case of letters of credit and trade-related lending, the terms of credit offered by large banks worsened.

The drop in trade at the peak of the crisis, between October 2008 and January 2009, is shown in Figure 1. The trade collapse was visibly much larger than the contraction in trade finance, seen in the red bars. At the onset of the crisis (2007:Q4-2008:Q4), trade finance actually increased; even during the peak of the crisis (2008:Q4-2009:Q1), trade finance fell by only one-third relative to the collapse in the export of goods. There was much geographic variation, but the largest drops occurred in Central Asia and Southeastern Europe. The situation remained negative but stable in the second quarter of 2009 and started to recover by the end of 2009 when Maghreb countries (in North Africa) and Middle Eastern countries (Emerging Asia) experienced the largest increase in goods exports worldwide.

When interviewed about the perceived causes of the contraction of trade finance, the surveyed banks returned answers surprisingly similar to the consensus emerging among economists. Respondents identified the fall in the demand for trade activities as the major source of decline in the value of trade finance but attributed about 30 percent of the fall to the reduced credit availability at either their own institutions or counterparty bank. Conclusion

Two of the major difficulties regarding policymaking in the area of trade finance are the lack of reliable quantitative information and the limited evidence on the relationship between international trade and trade finance. Recent research and efforts in data collection, however, are fostering the understanding of this relationship and, ultimately, of the potential impact of different policies that may limit the negative effects of financial crises in the future.

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