(Reuters) - Trade finance is under pressure from a shortage of dollar-denominated lending and banking regulations that could prompt some lenders to quit the world's least developed markets, trade finance sources said on Tuesday.

Their comments followed a meeting hosted by World Trade Organization chief Pascal Lamy.

Lamy said the situation was "clearly deteriorating," especially in the Middle East, southern and eastern Europe, and Africa, one of the sources said, on condition of anonymity.

Lamy had called the meeting of his "expert group on trade finance," including representatives from regional development banks and listed firms such as JP Morgan, HSBC and Standard Bank, to decide what message to send to G20 leaders when they hold a summit in Cannes early next month.

The G20 had asked Lamy to review the effectiveness of trade finance, which -- although it is not governed by the WTO -- is fundamental to the world trading system.

After the meeting at the WTO office in Geneva, a second trade finance source said the tighter liquidity and tougher banking regulations were prompting some big commercial banks to consider shutting down their African trade finance operations.

"If you're trying to cut down your balance sheet, what do you cut first? You cut Africa," the source said on condition of anonymity.

Basel Committee

A lack of financial guarantors would lead to a return to the days of "suitcase banking," with large sums of cash being lugged from buyers to sellers, the second source said.

To oil the wheels of trade in the poorest countries, the Basel Committee on Banking Supervision may exempt those trade deals from a rule that says local businesses cannot have higher credit ratings than their government, he said.

The rule puts an onerous burden on trade finance which -- even in places where governments are considered barely creditworthy -- has been shown to be the safest form of finance, since it is backed by the value of the merchandise.

"A letter of credit is treated like sub-prime," the source said.

Under the hoped-for exemption, it would be left to trade financiers to do their own due diligence to determine a counterparty's creditworthiness, allowing them to extend cheaper credit. Up to 60 countries could be included in the scheme.

"This is an issue on which we found the Basel Committee to be very open," he said, adding that he expected an answer at the G20 summit.

Even if trade finance gets a boost from the tweaked Basel rules, the global financial crisis has given rise to a new problem: liquidity.

"The current lack of U.S. dollar funding is having a big impact on banks," he said. "They keep needing dollars but they don't find them any more on the interbank market."

European banks were most subject to the dollar squeeze, but liquidity in general was a problem, he said.

There are few statistics on trade finance, thought to account for about $12 trillion to $14 trillion of the $35 trillion in global short-term capital movement, but the vast majority of trade is done on credit, so if finance dries up, trade may follow.

October 19, 2011

Source: Reuters

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