Revisiting the IFC Global Trade Liquidity Programme

TXF: As we mark a decade since the start of the global financial crisis it seems appropriate to revisit some of the responses to the crisis from the trade finance market. This is an extension to an existing facility launched in 2009. Can you give us a quick history of how each GTLP works, why it was conceived in the first place, and why Citi got involved?

John Ahearn (JA): Well if you go back and you look at the events around 2008-2009, the markets were in incredibly difficult positions. Everybody was talking about how world trade was falling off the cliff. Liquidity had gotten extremely expensive. And what was very interesting was if you look at how capital flows, especially in trade. Trade is predominately US dollar driven - probably 80-85% US dollars.

Most of the major suppliers of US dollars to the emerging market banks were very much tied up in the crisis. So, you had these banks significantly cutting their balance sheet. There was concern about how much liquidity they were going to have, etc. And then on the other side of the equation you had all of these emerging market banks that were looking for US dollar liquidity and needed that US dollar liquidity to keep continuing to finance their SME and middle market clients. The goal was to find additional sources of liquidity that could be targeted specifically to those markets to make sure that they continue to have access to US dollars to allow their economies to continue to operate and to expand.

There was a conversation that we had with the IFC, and Citi and the IFC have a very long history, a very long partnership. They were coming to us saying: ‘how do we get involved, how do we make sure that liquidity continues to flow to the emerging markets’. They're very actively involved in trade.

I can tell you originally IFC was a little bit resistant to doing it on a funded basis. They have a programme that's been out there for years and years and we use it quite actively, mitigating risk on an unfunded basis. They went out and they talked to a variety of governments around the world. I don't remember who came in first, who came in second, and then eventually the programme was rolled out to a variety of other banks to use it, and it was interesting as you watch the financial crisis kind of roll through. So, the US banks were very active in doing GTLP in around 2008-2009. It wasn't until we got into probably 2010-11 that the European banks, because now they were going through their own liquidity crisis, really came on board and that's when the GTLP got up to scale.

TXF: What kind of transactions does the GTLP support?

JA: Typically, the end users are financial institutions. They are financial institutions in very, very selected emerging markets. They cannot be state-owned banks, so they have to be private banks. They have to have a certain risk rating. What's really been nice about how the GTLP has worked is as certain countries have so-called ‘graduated’ they've become ineligible for the GTLP. But as other markets go through stress the IFC will add those markets to banks that are eligible for the GTLP. So, Citi acts as the wholesale lender basically.

And we're lending both our funds and the IFC's funds into emerging market banks. Typically, they're trade finance, they're trade loans to FIs, less than 180 days is pretty much the norm, in targeted markets that both the IFC and Citi agree are places that need liquidity.

TXF: Could you give us some examples of how the sort of the geography of the programme has changed?

JA: Some markets have progressed and are on stable footing, others are going through political turmoil, credit turmoil, whatever. And again, this is a way to make sure that US dollar liquidity is still available, and that these banks can continue to finance their exporters or importers etc. and that global trade continues on in those markets.

TXF: My memory of when the programme initially started was that one of the great reasons Citi fitted the program so well, was because of your global footprint, is that part of it?

JA: Yes, it was globality. So, what was nice about it [was] especially the Citi franchise – the IFC could partner, especially in the early days because we were working through legal agreements, they could partner with the bank that had a very large global footprint and there therefore they had access to a pretty significant market. Versus if you had done some of the smaller banks, or some of some of our competitors, maybe you could have gotten X amount on the market but you wouldn't have had the globality that Citi has.

TXF: Are you in similar partnerships with other institutions that have the same size and scope?

JA: We've done other programmes. We're very good at trying to go into some very difficult markets, and in those difficult markets look to basically leverage our risk appetite with partners. We did another programme a number of years ago with the European Investment Bank, for Greece. This is when Greece was having their financial trouble. We just recently closed the deal with the Asian Development Bank similar to the IFC. We use EBRD, we use a whole variety of these. And typically it's a way for us to leverage up our balance sheet.

When I say leverage up, to do let's say a $50 million project that we wouldn't want to do just on our balance sheet alone, but share 50-50 or 25-25, and Citi is very attractive to a lot of these multilaterals because they also want banks that can originate, and they want banks that they know and are comfortable with the underwriting skills of the bank. So, we do this with a whole bunch of partners around the world. One of the things I think we do very well, is we're very good at reacting to issues. If you go back and you look at the European Investment Bank deal, we were able to get that done probably six or seven months from the time Greece really started running into trouble. 

And again we had a lot of FI clients in Greece that were looking for us to extend significant amounts of credit. It was unclear to us exactly what was going to happen with that market, but these were very good clients. We didn't want to just abandon them. We said ‘how do we go in and work with someone else to make sure that we can give them the financing that they need’. That's sort of the history of how we've done this and again we've been doing it for a very long time.

TXF: I began by saying that it's been 10 years since the start of the crisis, and this was one of the responses. Is it now just part of the industry? Because if you're responding to a crisis, eventually you might sunset a program, but this now seems to be quite entrenched.

JA: Yes, the whole industry has shifted. Citi has shifted quite dramatically over the last 10 years. Historically, trade was a was a book and hold asset. You originated the deal, you put it on your balance sheet, it stayed there forever until it got paid off, and then you went and did another one. What everyone's learning is that you really do need distribution of this paper, you need an efficient way to churn that book, because from a capital point of view, from a liquidity point of view, having a book and hold business just doesn't work anymore. So we're very active in selling supply chain finance assets and a variety of other assets into the secondary market. I believe we're probably the number one seller in the world, but there's no league tables. Maybe TXF can work on that.

TXF: I'll see what we can do!

JA: But, we have those kinds of distributions, but then we also use programmes like this, the IFC, EBRD etc. as a way to leverage. And what we found very attractive about the IFC programme was because it was funded, we get true sale, and so therefore it takes all the regulatory capital off of our balance sheet, etc.

And the programme we just announced with the ADB is very similar. It's true sale for us. And to us it's just another distribution method. Whether or not it stays as part of the core trade business, will depend a lot on the multilaterals, and how do they view this. Do they think this is good business? Do they think it's an appropriate use of their donor funds, or do they want to divert those funds someplace else in the future?

But for today we're very happy we've renewed, we've just in the done the ADB one, we're in the process now of talking about talking to the EIB about renewing Greece, because there's still a problem. We're having a conversation with a couple of other development agencies about some other countries that are currently going through some stress. Argentina is one of the names that are now being talked back and forth, and you know between all their economic issues that they're having. It is part of the business. But it's going to depend on the politics of the country that's in trouble, and whether or not the multilateral world or the development agencies really want to support them, versus who are viewed as sort of outliers and not good credit risks.