Trade Finance: Asia's Coming Mini-Financing Crunch

by Cesar Bacani, 25 July 2012

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topics:
Corporate Finance Finance and Banking

tags:
trade credit insurance trade finance

Even in the depths of the 2008 global financial crisis, Asia’s companies did not really have a problem with their banks. Some lenders pulled or cut credit lines, but the region’s enterprises had enough cash on their balance sheets to ride out the credit crunch.

Not in this current Eurozone Crisis. Asian balance sheets are still awash in cash, but trade financing is becoming scarcer as European banks, which traditionally specialise in trade finance, are withdrawing from Asia and other markets because of what’s happening in their home countries.

What can CFOs do? Richard Green (pictured), Head of Political Risk and Structured Trade Credit Practice, Asia, at insurance broker Marsh, spoke to CFO Innovation’s Cesar Bacani about the region’s looming mini-financing crunch. Excerpts:

At the CFO Innovation Asia Forum in Singapore in June, some CFO panellists spoke about their company facing a mini-financing crunch because European banks are withdrawing from Asia.

European banks are scaling down a number of financial activities because they have to considerably de-leverage their balance sheet. They are cutting back on their exposures, they’re repatriating their assets to their home countries and in addition to all of that, they’ve got regulatory capital requirements to consider.

In a recent report, the International Monetary Fund said that, in their view, European banks would have to cut back their balance sheets globally by US$2.6 trillion in the next 18 months. And obviously some of that cutback is going to come from trade finance.

Within trade finance, the emerging markets are particularly vulnerable, which is why Asia is affected . . . The thing is, you can’t have trade growth without trade finance. Trade needs to be financed. Without finance, there’s not going to be trade.

And that is concerning because European banks specialise in trade finance and shipping finance, for example, all these specialist things that other banks don’t really focus on.

Yes, you’re right. It’s the European banks that are traditionally the global leaders in trade finance. Their withdrawal, even in part, from that market has a big impact.

There’s a bit of variation. The French banks are very strong in commodity financing. The Italian and Spanish banks have been strong in financing infrastructure.

Maybe Chinese companies

Submitted by Daniel Green on 29 October 2012 - 4:04am

Maybe Chinese companies should visit the http://www.absolutewealth.com/ website and hire specialists. At some point they will have to do that if European banks keep closing their doors in the Asia region.

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