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Guaranteeing Trade in a Severe Crisis: Cash Collateral over Bank Guarantees

Author

Listed:
  • Antonis Kotidis
  • Ms. Margaux MacDonald
  • Dimitris Malliaropulos

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.

Suggested Citation

  • Antonis Kotidis & Ms. Margaux MacDonald & Dimitris Malliaropulos, 2023. "Guaranteeing Trade in a Severe Crisis: Cash Collateral over Bank Guarantees," IMF Working Papers 2023/038, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2023/038
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    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;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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