Abstract

GUARANTEEING TRADE IN A SEVERE CRISIS: CASH COLLATERAL OVER BANK GUARANTEES


Antonis Kotidis
Board of Governors of the Federal Reserve System

Margaux MacDonald
International Monetary Fund

Dimitris Malliaropulos
Bank of Greece and University of Piraeus

Abstract

Banks guarantee international trade through letters of credit. This paper analyzes what happens to trade when the critical role of banks as trade guarantors is compromised. Using the case of the Greek capital controls in 2015, the events around which led to a massive loss of confidence in the domestic banking system, we show that firms whose operations were more dependent on domestic banks suffered a steep decline in imports and, subsequently, exports. This operated through letters of credit, which during the capital controls period had to be backed by firms’ own cash collateral rather than the bank guarantee. As a result, cash-poor firms imported relatively less. Public intervention to guarantee transactions is shown to help mitigate some of the decline in imports.

JEL-Classifications: F14; F23; F34; G21
Keywords: Bank guarantee, letters of credit, imports, exports, capital control

Acknowledgements: The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Federal Reserve System or its Board of Governors, the International Monetary Fund, its Executive Board, or IMF management, the Bank of Greece or the Eurosystem.

Correspondence:
Dimitrios Malliaropulos
Bank of Greece,
21 El. Venizelos Av.,
10250 Athens, Greece
Tel.:0030-210-3202380
Email: dmalliaropulos@bankofgreece.gr