Trade finance and Latin America's lost decade: The forgotten link

Abstract

The Great recession has brought back to foreground the link between trade credit, international trade and economic growth. Scholars have recently found that the effects of the fall in trade finance are strong and accurately explain the recent fall in international trade. We argue that the lost decade that followed Latin America's debt crisis is a useful comparative benchmark to recognize the scope of impact on international trade stemming from a sharp decline in trade finance. The years that followed the Mexican debt default of 1982 experienced a decrease in the financial flows to the region. However, the lending policies adopted by export agencies had a countercyclical effect. They reacted to defaults by suspending their cover activities for exports to defaulting countries, but soon reintroduced them once governments entered into a credit program from the IMF. This paper is the first to estimate the impact of trade finance on international trade in the aftermath of Latin America's debt crisis.