Mario Cordoni, CEO and Founder of CFE Finance Group, discusses the importance of Trade Finance in today’s global economic context
The Role of Trade Finance in the Current Global Economic Context
In today’s historical context, marked by uncertainty at all levels, certain sectors of finance play a key role in facilitating transactions and trade between different countries.
Among these is Trade Finance, an activity aimed at funding global trade operations. This practice involves multiple stakeholders. On one side, there are institutions specifically created to finance the import of goods, while on the other, a system exists to mitigate the risk of non-payment of debts owed to exporting countries.
The level of globalization achieved in the 21st century has led to an unprecedented increase in trade between nations. This, combined with the sudden socio-economic shift caused by the recent health crisis, has significantly increased the demand for payment extensions and heightened credit risk in international trade transactions. As a result, there has been a growing need for financial support from specialized operators.
This is particularly true for trade with emerging markets, which even before the pandemic required more sophisticated risk mitigation strategies, often supported by the World Bank Group. In such contexts, companies like CFE Finance Group collaborate with commercial banks and Export Credit Agencies (ECAs) to finance trade transactions through tailor-made investment vehicles.
Various financial instruments are used in Trade Finance, including buyers’ credit (short- and medium-term credit lines provided to importers to finance the purchase of capital goods, services, and other valuable assets), suppliers’ credit (payment deferrals granted to exporters dealing with foreign buyers), silent confirmations (agreements between the beneficiary and the confirming bank), and credit loans. Depending on the type of transaction, a Trade Finance specialist may finance either the exporting or importing country, assuming direct credit risks or those secured by bank or insurance guarantees, as well as sovereign risks.
Among the key players in global Trade Finance, the Paris Club holds particular significance. Established in the 1950s, it is an informal group of creditor nations comprising the 22 wealthiest countries. Its objective is to find sustainable solutions for restructuring the debt of developing countries facing payment difficulties. Since its inception, the Paris Club has signed 470 agreements with 99 debtor countries, renegotiating a total of $588 billion in debt.
All operations handled by the Paris Club are insured, and as with any insurance, there is typically a deductible—ranging from 10% to 15%—borne by the exporter.
CFE Finance Group has been financing restructured Paris Club operations since 2001, participating in substantial sovereign debt transactions involving countries such as Algeria, Russia (former USSR), Peru, Iraq, and various African and Asian nations. More recently, the company has been involved in cases such as Argentina.
The role of Trade Finance is now more critical than ever in supporting the recovery of the global economy. By enabling the development of sophisticated solutions to facilitate exports to and from high-risk countries—where other financial institutions may be reluctant to engage—it serves as a vital tool for stabilizing and advancing international trade.
La mia Finanza, 14 December 2020
