The worsening global economic crisis has severely undermined trade finance, with the shortfall in the availability of credit for the trading community rising to around $100 billion, according to sources who attended a meeting of bankers at the World Trade Organization today.
Following the pronounced slump in international trade and seizing of credit in the face of huge losses suffered by banks, trade finance has been debilitated, particularly in emerging countries.
Several exporting countries in Asia — from South Korea to India — are now experiencing a growing shortage of funds with the spreads on basic trade financing instruments, like opening letter of credit and counter-guarantees, having shot up over the last five months.
In normal times, traders of goods and services were paying about 15 basis points above LIBOR for their vital operations.
After the enveloping financial storm, the spreads within trade finance sector shot up to about 120 basis points over LIBOR or 1.2 per cent in Indian banks, while running into thousands of basis points in many African countries, according to sources who participated in today’s meeting.
China, with its huge current account surplus, managed to address problems encountered by its exporters in trade finance, say bankers, suggesting that other Asian countries must provide immediate liquidity for their exporters and importers.
The collapse in demand in the US, which was often treated as the consumer of the last resort during the boom days, has severely affected leading Asian exporters in China, Japan, South Korea, Taiwan, Singapore, Hong Kong and India among others.
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World Bank President Robert Zoellick recently suggested that 90 per cent of reduction in trade finance was largely due to the shrinking demand, while 10 per cent of difficulties stemmed from the banking system.
There is no clear consensus on how much is needed to be pumped into the arena of trade finance though bankers say that around $100 billion would address the problems of the trading community in the immediate short-term, sources said.