Trade finance: The world turned upside down
Pricing in trade finance – which is driven primarily by the cost of liquidity and the cost of risk – has had a rollercoaster rise in the past two years. “There exists a historical anomaly in trade finance whereby Indonesia risk is now priced lower than that of the US or the UK – never mind Ireland or Greece,” explains Tan Kah Chye, global head of corporate cash and trade at Standard Chartered. “Trade pricing for emerging markets is now significantly lower than for what were known as leading economies.”
For example, Indian banks might have been charged 80 basis points for 90-day funding before the crisis, 6% at the height of the crisis and below 1% now. A US regional bank might have paid as little as 30bp before the crisis, had no access to the market at the height of the crisis, and now pays more than 1%. The differential in pricing is not based on conventional assessments of risk such as credit ratings, according to John Ahearn, global head of trade finance at Citi. "A funded deal for a triple-B rated OECD credit might cost 250bp compared with 150bp to 180bp for a similarly rated emerging market credit," he says. "Is this rational pricing? Clearly a cushion is being added to account for the potential change in the cost now versus the cost in the future." Tan at Standard Chartered is equally circumspect about the pricing of OECD credit. "The differential is not justifiable in the long term," he says.