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- Title
Guaranteeing Trade in a Severe Crisis: Cash Collateral Over Bank Guarantees.
- Authors
Kotidis, Antonis; MacDonald, Margaux; Malliaropulos, Dimitris
- 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.
- Subjects
CAPITAL controls; LETTERS of credit; INTERNATIONAL trade; INTERNATIONAL banking industry; COLLATERAL security; CAPITAL movements; BANKING industry; SURETYSHIP &; guaranty
- Publication
Open Economies Review, 2024, Vol 35, Issue 2, p261
- ISSN
0923-7992
- Publication type
Article
- DOI
10.1007/s11079-023-09725-6