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Trade and Finance Crisis

Trade and Finance Crisis . Economic Forecasting was wrong: decoupling hypothesis rejected by the reality. One year ago: decoupling between developed and developing countries. Main factors of recession in developed countries: domestic demand and credit crunch

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Trade and Finance Crisis

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  1. Trade and Finance Crisis

  2. Economic Forecasting was wrong: decoupling hypothesis rejected by the reality • One year ago: decoupling between developed and developing countries. Main factors of recession in developed countries: domestic demand and credit crunch • One year later: all institutions looking at a new set of forecasts, see international trade as the main factor of recession – less resilient than domestic demand. Why? • Globalization works both ways, symetrically. The increased economic interdependance leading to contagious contractions of output

  3. What are the main elements of contagion? • Financial sector to real economy: credit crunch – affecting financing of output. Lack of trade credit starving trade flows. Low interest rates = preference for liquidity/savings. Might actually boost domestic demand. Crowding out effect: availability of Government paper, crowds out bank lending • Real economy to financial sector: demand-driven failures will further deteriorate bank assets – which will further retard the recover and might lead the world economy from crunch to deflation. • The trade link: at macro-level, if final demand is hurt in major trading economies, request for exports and imports will shrink. At micro-level, the density of forward and backward links between economies, notably at regional level, is exercizing accelerating effect on output and trade contraction through supply chains.

  4. TRADE AND FINANCE AGENDA OF WTO • Important in financial crisis: avoid contagion • Maintain flows of trade finance in line with demand • Avoid protectionist reactions – defeat the purpose of recovery plans • Consider DDA as a recovery plan of its own

  5. Task force on Trade and Financial Crisis: increased surveillance • 3 levels of action • Push for the conclusion of the DDA • Enhanced surveillance of Trade Policy Developments, with and amongst WTO membership • Advocacy and mobilization in area of trade finance to avoid trade finance to be an additional factor of contraction of trade flows

  6. DDA: for a rapid conclusion • Often argued that long way to go to conclude DDA. Not so long. 80% ground covered in NAMA and Ag. • No matter how one calculates gains of DDA: $130 bn for tariff reductions, $250-500 for welfare gains, DDA is a big as a recovery plan with permanent effects • Hope to make progress by Spring/summer 2009

  7. Tracking trade and trade policy measures • Improved system of forecasts and statistics • Improved system of surveillance with quarterly reports by Secretariat to WTO Members on protectionist reactions. Two way track: confirmed sources (by members) and free sources (press, TPRs). Triggers a discussion inside WTO. Look at all measures from a non-legalistic point of view: border measures, subsidies, bail-outs, etc.

  8. Trade Finance role • Since WTO November 12 meeting – one step up debriefing WTO Members, IMF and WB. Greater level of mobilization, strong message to G-20 • Pb: shortage of liquidity and disporportionate aversion to risk lead to shortfall in commercial banks of $25bn. Credit price and insurance up to three times normal circumstances • Solution? One mean is for international and regional leaders to shoulder some of the risk through co-financing and thereby entice private lender back into this market.

  9. What is being achieved? • Export credit agencies from OECD and non OECD stepping in: provision of working capital to SMEs; support of chain supply links (ECAs are conducting operations regionally) • RDB and IFC doubled ceilings on trade finance facilitation programmes, up to 7-8 billion (financing capacity of $30-40 bn of trade to low income countries). • Central Banks are providing forex to markets • Integrated cooperation between a multilateral, banks and ECAs = question of creating a liquidity pool for banks, and measures for ECAs.

  10. G-20 in London: G-20 Leaders adopted a trade finance package aimed at putting at least $250 billion at the disposal of the market, though a menu of various instruments provided by IFIs, ECAs and governments. Implementation of that package is underway.

  11. Thank you for you attention!

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