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

Antonis Kotidis, Margaux MacDonald and Dimitris Malliaropulos ()
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Antonis Kotidis: Board of Governors of the Federal Reserve System
Margaux MacDonald: International Monetary Fund
Dimitris Malliaropulos: University of Piraeus

Open Economies Review, 2024, vol. 35, issue 2, No 3, 282 pages

Abstract: 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.

Keywords: Bank guarantee; Letters of credit; Imports; Exports; Capital control; F14; F23; F34; G21 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11079-023-09725-6

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