# **1.  Introduction**

International trade has plunged in the latter half of 2008 and the course of this year (Baldwin, 2009). The global financial meltdown has not only led to a substantial drop in economic activity in both emerging markets and the developed world, but has also made it increasingly difficult for potential trading partners to gain access to external finance. While trade finance - due to its selfliquidating character - is generally on the low risk and high collateral side of the finance spectrum, as well as underwritten by long standing practices between banks and traders, developments have shown that it has not been spared by the global credit crisis (Auboin 2009, Chauffour and Farole, 2009).

The sharp drop in trade volumes was driven primarily by a contraction in global demand. Yet, the decline in trade finance - itself driven mainly by the fall in the demand for trade activities, but at least partly also by liquidity shortages - is likely to have further accelerated the slowdown. Surveys conducted by the IMF in cooperation with the Bankers’ Association for Finance and Trade (BAFT) and by the World Bank suggest that some emerging markets have been impacted severely by the lack of available trade financing options (IMF/BAFT, 2009 and Malouche, 2009). The anecdotal evidence from banks and traders reinforces this view; as does the sharp increase in short-term trade credit spreads and the sheer size of the drop in trade volumes. Reliable statistics on trade finance are scarce, which poses major problems for the analysis of the underlying reasons driving the collapse in world trade. But available evidence suggests that trade credit was the number two cause of the trade collapse after demand (Mora and Powers, 2009).

Both bankers and the international community have since called upon state-backed Export Credit Agencies (ECAs) to expand their operations to mitigate credit risk and keep trade finance markets from drying up. At two BAFT trade finance summits in January and April of 2009 the international community pledged to “ _enhance the secondary market for trade finance risk with ECAs_ ” and to “ _adjust ECA programs to facilitate and accelerate trade financing in emerging markets_ ”.<sup>2</sup> At their September 2009 summit in Pittsburgh, leaders of the G20 welcomed the swift implementation of the $250 billion trade finance initiative that was agreed at their April 2009 meeting in London to support trade finance, including through their export credit and investment agencies.<sup>3</sup> Most ECAs have been founded with the stated objective of promoting foreign trade and/or alleviating financial sector related constraints in providing the necessary financial sector products to domestic firms involved in foreign trade. Given the renewed interest in these institutions and the fact that such institutions have for decades been part of the financial sector landscape in many countries, including many developed countries with relatively large foreign trade sectors, the question arises whether developing countries should follow suit and establish their own agencies to support exporting firms and to avoid complete trade finance shortages in times of crisis.

> 2 <u>www.baft.org.</u>

> 3 <u>http://www.g20.org/Documents/pittsburgh_summit_leaders_statement_250909.pdf</u> and <u>http://www.g20.org/Documents/final-communique.pdf</u> .

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