this is the result of market and/or government failures, and therefore whether there is a rationale for intervention or correction to address them.

A precondition for answering this question is to understand what a trade finance gap is and what could contribute to its existence. First, a decline in _demand_ for trade finance cannot constitute a gap. A drop in trade finance could simply be the consequence of declining trade volumes, as long as these trade declines did not derive wholly and directly from _trade finance_ constraints. Second, problems with trade finance supply must be distinguished from problems with the provision of other forms of credit. If, for example, a South African exporter cannot obtain a loan to purchase a new piece of capital equipment as a result of the seizing up of credit markets and/or a recalibration of market-level risk, this is likely to have a dampening effect on trade. However, it suggests a problem with credit markets more generally and not necessarily one of trade finance per se. In fact, the uncertainty brought about by the crisis might actually result in an _increase in demand_ for trade finance (at pre-existing price levels), as trading partners resort to more formal, bank-intermediated instruments in order to reduce the higher expected probability of default in open account trade.<sup>11</sup> Indeed, in the recent ICC Survey (ICC, 2009) 48 percent of banks indicated they had experienced an increase in demand for issuance of bank undertakings between the last quarter of 2007 and the last quarter of 2008 (despite stagnant trade volumes). These developments are consistent with the data released by the Berne Union of export credit and investment insurance agencies, which indicate that, in the last quarter of 2008, total new insurance commitments have fallen by much less (7 percent) than trade volumes (20 percent), with medium and long-term commitments remaining constant in volume.

A real “gap” would therefore only emerge in a situation in which the supply of trade finance is insufficient to clear markets either because it is not being supplied at all (i.e., “ _missing markets_ ”) or at prices that are temporary too high to meet demand in the market (i.e., “ _overshooting markets_ ”). The first scenario corresponds to a decline in the supply of trade finance (at any price) despite the existence of demand; while the second scenario is that of a supply of trade finance at prices that firms are temporarily unwilling or unable to pay. Both scenarios suggest a real “gap”, which would result in deadweight loss for the economy. In these cases, intervention may be required.

# _“Missing markets": insufficient supply of trade finance_

While trade finance transactions are dispersed globally, overall volumes are highly concentrated in a few major international banks, several of which (e.g. Lehman Brothers) went under in the latter part of 2008. Their business would be expected to be reallocated relatively quickly among other suppliers, at least in an efficiently functioning market. However, the severe liquidity constraints and a collective collapse of confidence may, in the short term, mean that alternative banks were unable or unwilling to take on this business. Thus, there might well be a need for some transitory intervention to address this supply gap in the market. In addition, the poor risk management practices of banks like Lehman Brothers may have had negative reputational effects on their customers seeking to find alternative trade credit lines in the wake of their collapse. Thus, customers may be facing a market sanction that has little to do with their individual risk profile. Such situations are a common motive for government intervention in many markets, including insurance and credit.

> 11 The economic crisis would be expected to threaten the viability of firms across supply chains and so would raise the overall probability of default in any inter-firm financed exchange.

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