TRADE RECOVERY IS FRAGILE / THE FINANCIAL TIMES ( RECOMMENDED READING )

Trade recovery is fragile, says ICC

By Alan Beattie in Washington and Geoff Dyer in Beijing

Published: April 21 2010 23:19

Falling trust among trading partners and banks cutting trade credit lines are menacing the recovery in global commerce, according to dozens of financial institutions round the globe.

More than 150 financial institutions in 75 countries surveyed by the International Chamber of Commerce said although world trade had bounced back quickly in 2009, it remained far from normal. “Prospects for a strong, lasting trade recovery were reported to be mixed,” the survey said. “Advance indicators of trade developments underscore the fragility of the current recovery.”

The report focused on trade finance – the form of credit which, in effect, insures against the importer crashing while goods are in transit – whose price rose sharply in 2008 as the global financial crisis took hold.

Amid fears that the machinery of world trade would seize up, multilateral development banks, including the World Bank, launched lending programmes to try to catalyse a revival in trade credit.

“The costs of trade finance remain substantially higher than they were pre-crisis, raising the problem of affordability for exporters,” the chamber said. Some 30 per cent of respondents indicated an increase in fees for commercial letters of credit and other instruments.

Banks said customers were requiring higher levels of insurance when dealing with their trading partners – demanding confirmed letters of credit rather than taking payments more on trust.

The survey said while the programmes of official support had helped, banks were continuing to cut trade credit lines. Victor Fung, chairman of the ICC and chairman of the Li & Fung Group, said the Basel III regulations on banking capital discriminated against trade credit and dissuaded banks from offering it. “There is something fundamentally wrong in the way the Basel rules are structured,” he told the Financial Times.

“Trade finance is inherently less risky than other types of lending but although there is less risk, the rules demand that banks allocate the same amount of capital as for other lending.”

The ICC has been waging a campaign for the Basel rules to be amended, though officials from the Basel committee say there is sufficient flexibility in the guidelines. “The rules allow regulators to be flexible over this issue, but we need to change the rules rather than rely on the discretion of individual regulators,” Mr Fung said.

Copyright The Financial Times Limited 2010.