IMF Working Papers

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

By Antonis Kotidis, Margaux MacDonald, Dimitris Malliaropulos

February 24, 2023

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Antonis Kotidis, Margaux MacDonald, and Dimitris Malliaropulos. Guaranteeing Trade in a Severe Crisis: Cash Collateral over Bank Guarantees, (USA: International Monetary Fund, 2023) accessed September 24, 2024

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.

Summary

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.

Keywords: Bank guarantee, Capital control, Exports, Imports, Letters of credit

Publication Details

  • Pages:

    31

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2023/038

  • Stock No:

    WPIEA2023038

  • ISBN:

    9798400234415

  • ISSN:

    1018-5941