October 10, 2008 / 2:22 PM / 11 years ago

WTO calls meeting on trade finance

GENEVA (Reuters) - The World Trade Organization (WTO) is inviting a dozen financial institutions and banks to a meeting next month to discuss the impact of the credit crunch on trade finance, the lifeblood of global commerce.

A letter from WTO Director-General Pascal Lamy, a copy of which was made available to the media, said several WTO members especially developing countries, had flagged problems in arranging trade finance.

“The purpose of our next meeting will be to review how the international market for trade-financing is faring in view of the current very difficult conditions on international financial markets,” Lamy’s letter said.

The November 12 meeting would also examine how to maintain and improve the availability and accessibility of trade finance at affordable rates for developing countries.

Around 90 percent of the $14 trillion in world trade is financed by credit, drawing on simple and traditional banking instruments dating back to the Middle Ages.

Because such loans are clearly collateralized — they are effectively backed by the cargoes they are funding — they are usually straightforward to organize.

As a result, despite the financial crisis, bankers active in this market say they have been doing a roaring trade this year.

But now some trade finance bankers say they are running out of capacity to handle deals, and furthermore in recent weeks the price has shot up, squeezing some exporters and importers, especially from developing countries, out of the market.

PRICEY IF YOU CAN FIND IT

Deals are now being offered at 300 basis points over interbank refinancing rates, three times or more the going rate a year ago.

On Monday Brazil’s government announced it would use its foreign reserves to increase credit lines for exporters who have been finding it hard to get trade finance.

And on Thursday the World Bank raised its trade financing program by $500 million to $1.5 billion by increasing the amount which its private-sector affiliate, the International Finance Corp (IFC), can guarantee to banks funding such deals.

Lamy invited the heads of the International Monetary Fund, the World Bank, regional development banks and the Berne Union of export credit and investment insurers to the meeting.

He also invited five leading banks in trade finance to attend — Citigroup (C.N), Commerzbank (CBKG.DE), Royal Bank of Scotland (RBS.L), JP Morgan (JPM.N) and HSBC (HSBA.L).

The meeting will examine why trade finance rates have shot up and consider whether regional development banks could make contributions similar to that of the IFC, trade sources said.

Lamy told a meeting of the WTO’s 153 members that trade financing volumes and rates had appeared normal when the trade body last reviewed them in April but it was necessary to monitor the impact of the crisis on trade.

He also repeated his warning that the uncertainty arising from the crisis could fuel protectionism.

“The role of the WTO as a firewall against protectionist responses is thus vital. It is not so much about any direct effect on markets as for sustaining confidence in global co-operation and institutions,” he said.

To reinforce the point Mexico’s WTO ambassador, Fernando de Mateo y Venturini waved a large photo of U.S. Senator Reed Smoot and Congressman Willis Hawley, whose 1930 act raising tariffs is widely blamed for intensifying the Great Depression.

Lamy said work on the WTO’s Doha round to open up world trade, launched almost seven years ago, was continuing after July’s failure by ministers to make a breakthrough.

He said it was still possible to reach an outline deal, but — according to a copy of his remarks — he did not put a time on that. Until recently Lamy had spoken of clinching the framework deal by the end of this year.

“Our chances of achieving our goal are clearly less than they were in July, but they are still good enough to warrant a major effort,” Lamy said.

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