3 Interfirm Trade Finance: Pain or Blessing during Financial Crises? Anna Maria C. Menichini
The severe recession that hit the global economy in 2008–09, causing low or even negative growth rates, caused widespread contractions in international trade in both developed and developing countries. The World Trade Organization reported that global trade volume contracted by 12.2 percent in 2009 because of the collapse in global demand brought on by the biggest economic downturn in decades (WTO 2010). The contraction in international trade has been accompanied by a sharp decline in the availability of trade finance and an increase in its cost. The decline is only partly explained by the contraction in demand; a joint qualitative survey by the International Monetary Fund and the Banker’s Association for Trade and Finance—now merged with International Financial Services Association (BAFT-IFSA)—found that trade finance has been constrained and its cost has increased, particularly in some developing countries, suggesting that part of the reduction in trade transactions reflects a disruption of financial intermediation (IMF-BAFT 2009). Although recent survey updates report signs of timid improvement in credit availability, the recovery prospects of trade finance markets remain weak (IMF-BAFT 2009; Malouche 2009). The situation has raised concern, especially for firms operating in developing countries that trade in low-margin products in long manufacturing supply chains and rely heavily on trade finance to support both their exports and imports. With restricted access to financing and increased cost, these firms may have difficulties maintaining their production and trade cycle. Fear that these difficulties could 59