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Guaranteeing Trade in a Severe Crisis: Cash Collateral over Bank Guarantees
Author:
Antonis Kotidis
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Ms. Margaux MacDonald
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Dimitris Malliaropulos
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Series:
IMF Working Papers
Volume/Issue:
Volume 2023: Issue 038
Language:
English
Publication Date:
24 Feb 2023
DOI:
https://doi.org/10.5089/9798400234415.001
ISBN:
9798400234415
ISSN:
1018-5941
Pages:
31
Keywords:
Bank guarantee; letters of credit; imports; exports; capital control; trade guarantor; cash-poor firm; outflow control; log letters of credit; bank intermediation channel; Capital controls; Credit; Commercial banks; Capital outflows; Asia and Pacific
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2023: Issue 038