A boost to letter of credit (L/C) business can be anticipated after the G20 leaders in London announced a multi-billion US dollar package to help revive international trade financing.

The G20's decision to support emerging markets should also help stimulate and sustain international trade.

L/C recovery

There will be US$250 billion in trade finance to kick-start international trade after lenders cut back on L/Cs, particularly since September 2008.

In a recent survey by the ICC Banking Commission more than 40 per cent of respondent banks indicated a decrease in letter of credit volume and value between the last quarter of 2007 and the last quarter of 2008.

Funding channels

The trade finance funds announced by the G20 will be channelled through export credit agencies and multilateral development agencies.

Several multilateral development agencies - such as the International Finance Corporation and the European Bank of Reconstruction and Development - already operate trade finance programmes that support L/C trades.

The US$250 billion package is a significant increase over the US$100-billion package discussed last month.

Emerging markets

The announcement of US$250 billion of Special Drawing Rights (SDRs) available via the International Monetary Fund (IMF) should also help sustain trade with and between emerging markets.

The package, which essentially appears to enable the IMF to apply quantitative easing in emerging markets, should help prevent the type of debt problems and soaring inflation experienced in the late 1990s by the so called Asian tigers, Russia and South American countries.

Bailouts

Mexico has already requested a precautionary credit line of US$47 billion.

The IMF is already bailing out Pakistan, Iceland, Latvia, Hungary, Ukraine, Belarus, Serbia, Bosnia and Romania.

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