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( Source of the document: ICC Digital Library )
A board member of the European Central Bank (ECB) said he is observing a move back towards traditional trade finance products such as letters of credit. Lorenzo Bini Smaghi said he was concerned about what he describes as a "grave side" of the current financial crisis - the collapse of international trade - which he believed was largely unpredicted. He pointed out that the collapse has slowed the process of economic integration, leading to a process of de-globalization, and that the countries that relied most on exports and manufacturing production have been hard hit by a crisis that originated in the financial sector.
Smaghi said that around 90 per cent of world trade was partially or totally supported by financial instruments, which, in recent years, have involved sophisticated credit instruments, that are also riskier. Now, Smaghi says he can see a return to more traditional financial instruments. "We are observing recently that trade finance is going back to simpler instruments, such as documentary credits and confirmed L/Cs, which substantially reduce risk," he said.