IMF Reports Trade Finance Under "Pressure" from Euro Crisis
Trade finance may be vulnerable to the Euro-area financial crisis, the International Monetary Fund (IMF) reports in its April 2012 World Economic Outlook. The IMF says that signs trouble in trade finance markets have already become apparent, although though the problem appears manageable so far.
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Euro Bank Troubles Could Spill Over into Trade Finance Markets; Interest Rates Already Rising for Some
The IMF said Euro-area banks have been reducing assets, raising concerns of a credit crunch and consequent negative effects on economic growth and financial stability, including in trade finance. Many Euro bank assets are short-term (i.e., maturities of less than 1 year), according to the Report, which makes sell-offs easier. As a result, troubles in trade finance markets, which is usually short-term, are a possible effect of the Euro crisis as European banks move away from holding short-term assets. Bank-intermediated trade finance, such as letters of credit, constitute about 35-40% of total trade finance (which, according to the IMF's definition, also includes terms of payment such as open account and payment-in-advance).
The IMF Report said that effects on interest rates in trade finance markets have already been seen, although availability of trade credit has not become an issue as a result of other banks boosting available credit to fill the gap left by Euro banks.
Euro Troubles Could Also Cause Stronger Dollar, Reduced Export Demand
The IMF reports that the Euro-area crisis, and Euro-area bank deleveraging, could affect trade in other ways as well. The U.S. and Japan, which have currencies used as international reserves and/or deep financial markets, could become safe havens and see increases in inflows of investment, causing their currencies to appreciate (and making U.S. exports more expensive). Foreign demand could also decline as European growth slows.
IMF Recommends Gov’t Responses to Ensure Supply of Trade Credit
Among other things, the IMF says that policymakers should ensure that the supply of credit is maintained trade financing, possibly stepping in through government programs if needed.