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The world is experiencing one of the most severe financial crises in modern history, with its epicentre in the United States and spill-over effects for major financial centres around the world. The correction of asset values is so strong that it has systemic implications on the soundness and safety of the entire international financial system.
Governments, central banks and regulatory authorities are acting on several fronts, injecting liquidity, re-capitalizing and restructuring financial institutions, and stopping risky behaviour that could further precipitate markets into depression. Beyond this, the realization that an over-grown financial system had developed "bubbles", based on poor assessment of risk and questionable use of ample flows of liquidity, has been raising questions in countries and internationally about the need to provide a stronger skeleton to the international financial architecture.
The financial crisis that we experience is a wake-up call indicating that the world economy cannot grow above the limits of its real production, and that feeding it by debt and liquidity may only provoke severe corrections.
This is not the first shock witnessed by the multilateral trading system. Despite its young age, the WTO has already faced previous episodes of financial crises, and has shown resilience. By keeping markets open during periods of financial and external payments crisis, the multilateral trading system has shown that it can give a chance to crisis-stricken countries to recover through trade. However, we have also learned from these periods that, to do so, access to trade finance at affordable rates must be maintained in such critical times to ensure that international trade can continue to play its shock-absorbing role.
After the Asian crisis and in other cases of an abrupt interruption of trade credit lines by international banks to some crisis-stricken countries, the WTO, in partnership with the IMF and the World Bank, formed an informal group of experts from regional development banks, credit insurance agencies and international banks involved in providing trade finance facilities of one kind or another. Under the banner of "coherence", the aim was to seek options to deal with the scarcity of trade finance during periods of crisis and what appeared to be a trend to withdraw from smaller developing countries' markets. Since then, the WTO has hosted meetings periodically to discuss how to address these shortcomings, the last one in April 2008. We sensed rising costs and liquidity shortages which were already hitting trade finance for particular developing countries and least-developed countries.
The meeting that I chaired this morning, with representatives of private banks, international financial institutions and export credit agencies, has confirmed that the market for trade finance has severely deteriorated over the last six months, and particularly since September. Two key problems were identified. One is a shortage of liquidity to finance trade credits. The second is a general re-assessment of risks caused as much by the financial crisis as by the slowing down of the world economy. These problems are being felt most acutely by traders and banks in the emerging market economies.
The view expressed this morning by the trade finance practitioners is that the situation is likely to deteriorate further in the months to come.
Some of these difficulties were becoming apparent even in April when I chaired the last meeting of this group of trade finance experts. Consequently, there are already some steps being taken to respond to the situation. Let me draw your attention in particular to the announcement earlier this week by the President of the World Bank, Robert Zoellick, that he intends to propose to the Executive Board of the World Bank/IFC a tripling of the ceiling, to $3 billion, of the trade finance guarantees available under the IFC's trade finance facilitation programme. This is a remarkable example of quick reaction by an IFI to current market developments and demand, and of Aid for Trade in action. The Berne Union has also informed us that export credit agencies have been stepping in much more actively in recent months. Collectively, they have increased their business by more than 30 per cent in the last 12 months, with an acceleration since the summer. We had confirmation that this increase in activity is being backed by some national governments, for example Germany, Hong Kong China, and Japan.
The message from some other regional development banks with similar programmes to that of the World Bank/IFC is that they too could do much more to respond in the market if their Executive Boards would also raise their ceilings on this kind of financing activity. Here is a clear message for WTO members - contact your finance and development officials who represent you on the Boards of the Regional Development Banks to promote their greater involvement in trade finance activities, as a lifeline for their economic activity.
What still needs to be done?
A priority task is to enhance capacity to mitigate the effects of the increased perception of risks and to provide the market with earmarked liquidity for trade finance. From that point of view, both the international financial institutions and the export credit agencies have the possibility to expand their contributions to cover risk and provide additional liquidity under existing instruments. But this will not happen without public authorities stepping in to provide them with more support.
The market currently estimates the liquidity gap in trade finance at about $25 billion. This is a sizeable sum, but not enormous relative to the amounts that central banks have found it necessary to inject into financial and banking markets in the past couple of months. The private banks believe that this gap could be filled reasonably comfortably through increased co-sharing partnerships with international financial institutions and export credit agencies to the extent that the trade finance and insurance programmes of these institutions are supported by their shareholders, which of course is you, the member governments.
A second task, that needs to be viewed over more of the medium term, is to improve mechanisms of information sharing, risk assessment techniques, and data collection on trade finance. That would expand the scope for co-financing trade between private banks themselves and between the banks and public sector institutions such as the IFIs and the ECAs. We heard some concrete proposals on how to move ahead on these issues this morning. Naturally, this is not a task for the WTO, but we do have something to contribute in my view and we shall continue to work with the various actors on these issues.
The costs of taking these steps and actions is not exaggerated. The market for trade finance is one of the most secure areas of banking and insurance activities and it has a strong multiplier effect on trade. At a time of decelerating trade and economic growth, investing resources to keep trade finance flowing has a vital role to play. Contrast that with the costs of inaction. The countries most vulnerable to shortages of trade finance are the emerging market economies on whom we are counting to sustain trade and economic growth as the developed countries slow down.
This is a useful message for the world leaders meeting in Washington on 15 November.
The world economy is slowing and we are seeing trade decrease. If trade finance is not tackled, we run the risk of further exacerbating this downward spiral. The global slowdown, whether it is called a recession in some parts of the world, a slump elsewhere, will last for some time, and will affect all countries. We simply cannot say that globalization is benefiting emerging economies when developed economies' global demand is expanding, and that no effect will be felt when such demand falls. At the national level, there will be risks, job losses, bankruptcies. There will inevitably be demand for greater safety nets and security which is legitimate. But there will also be demand for protectionist measures.
The political message that WTO members should send both inside the multilateral trading system and outside is that the WTO is ready to take this challenge with a strong sense of collective responsibility and solidarity. Members should resist calls for protectionists measures. In a globalised world, one protection is another ones lost opportunity. And everyone's protection - the kind of beggar-thy-neighbour that we saw in the '30s - is a recipe for a severe contraction of international trade, depressed growth and rising unemployment, again the kind of situation we saw in the '30s. This was evident during the Asian and Latin American financial crisis of the '90s. Governments understood that keeping markets open was part of the solution, not of the problem, and WTO disciplines helped resist calls for closing trade.
The second message is of course to oppose financial chaos by further organized, regulated and balanced trade opening through the Doha Round. While countries struggle with the design of global financial rules, they could send a positive signal by better regulating international trade through the completion of the Doha Round.
After seven years of negotiations, we have come a long way in our collective endeavour. My sense is that we are not that far away from our objective of concluding the Round, even if a number of tough nuts remain to be cracked, notably in the agriculture and industrial modalities, which would be a stepping stone towards a final Doha deal. My sense is that we can achieve modalities in these two areas by the year-end. I remain of the view that it is doable. And it is also even more desirable now than a year ago. But we now need to do it. The process to get there is the very good old recipe of bottom-up, transparency and inclusiveness. But above all, a common desire to mitigate the impact on your people of the severe deterioration of their economic, and hence their social, conditions.
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