The global shortfall in trade financing has expanded by up to four times since November to around US$100 billion, with emerging markets feeling the pinch due to the credit crunch, a trade source said on Wednesday.
“The magnitude of the gap has increased by three-fold or four-fold,” said the source after a WTO meeting that brought together experts and bankers on trade financing.
A similar meeting in November estimated the shortfall in cash to finance trade at US$25 billion, or 0.25 percent of the overall market, which is worth US$10 trillion.
A drought in liquidity is now not only affecting industrialized markets such as the US but also hitting emerging markets including India and South Korea.
“What started as a problem on Wall Street and London that was directly linked to the liquidity crisis — that problem has moved gradually to emerging markets,” the source said. “It’s no longer about north-north trade financing, it’s about north-south, and south-south trade financing.”
Trade financing has been described as the “lifeblood” without which global trade would stall. It comes in the form of credit issued and guaranteed by banks to importers and exporters.
Key banks active in the field of trade finance such as HSBC, JP Morgan, Royal Bank of Scotland and Commerzbank sent representatives to Wednesday’s meeting, sources said.
Amid the liquidity crunch, trade financing has dried up, with financiers now requiring more collateral before issuing credit and charging higher interest rates.
The trade source said that while interest rates averaged 15 basis points above central bank rates in the past, charges now ranged from “120 basis points for the best bank in India to several thousand basis points for central Asia.”
Governments and international institutions have been taking action to fill gaps, the source noted, saying that there has been a “mushrooming of initiatives.”
“At the same time, as they manage to fill that gap, then another gap is created somewhere else around the globe,” the source said.
One plan led by the World Bank and its associates is a “global trade finance liquidity pool” that would offer a US$10 billion to US$11 billion package in financing at the G20 summit in April, he said.
“In terms of gap filling, it’s a race against time,” he said.
He noted however that the situation has improved lately in China, but there is a “huge need for support to Africa.”
Meanwhile, EU leaders were set to rebuff calls to pump more taxpayer money into their ailing economies at a summit yesterday and today focused on tackling the increasingly dire economic crisis.
European governments have mostly turned a deaf ear to calls for more action, insisting next month’s G20 London summit should have a firm focus on revamping the global financial architecture they put at the heart of current problems.
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