A board member of the European Central Bank (ECB) says he is observing a move back towards traditional trade finance products such as letters of credit (L/Cs).

Lorenzo Bini Smaghi was talking to delegates at the ECB Conference, held at the end of March in Milan on developments and prospects for the European economy in 2009.

Trade collapse

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-globalisation - 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.

Riskier instruments

Smaghi suggested that according to some estimates, around 90 per cent of world trade was partially or totally supported by financial instruments, which in recent years have become rapidly more innovative.

This led to a larger number of transactions being based on sophisticated credit instruments, which he reckons are also riskier.

Back to basics

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.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.