Why does trade finance matter?
One of the reasons for the collapse of world trade is insufficient trade credit financing. The global market for trade finance (credit and insurance) was estimated to represent approximately 80% of 2008 trade flows, valued at US$15 trillion. The World Bank estimates that a fall in the supply of trade finance has contributed some 10% to 15% of the decrease in world trade since the second half of 2008. Despite the overall fall in trade transactions, quantitative and qualitative surveys confirm a general increase in trade credit prices, as banks demand risk premiums often far in excess of loans made to other banks. This has led to a mismatch between supply and demand for credit. Two arguments are often put forward to explain the presence of trade finance gaps. The first relates to market failure arising from the inability of private sector operators to avoid herd behaviour when credit and country risks become highly uncertain (e.g., existence of rumours of sovereign default). Secondly, on
