The Economist USA - 26.10.2019

The EconomistOctober 26th 2019 Finance & economics 67

1

E

very dayof the week thousands of visi-

tors flow through Istanbul’s fragrant

Spice Bazaar. They are a varied collection,

local shoppers mingling with camera-

wielding tourists. So are the products on

offer. While many delicacies on display are

Turkish-grown, one trader gets his berries

from Iran, his walnuts from Chile and al-

monds from California. Another, asked if

she went all the way to China to buy her jas-

mine tea, says wryly: “Of course not. Im-

porters ship it here.”

Most commodities traded round the

world still travel on merchant vessels.

From Istanbul’s hills you can see them

placidly converging on Ambarli, Turkey’s

largest port. Less visible is the liquidity that

makes those journeys possible. Four-fifths

of global trade transactions, worth $15trn a

year, rely on specialised loans or guaran-

tees. This hidden world of trade finance is

huge but poorly understood. It has long

needed a shake-up, and a nascent revolu-

tion promises to unlock trillions in fresh

capital. But trade wars are putting that Big

Bang in peril.

Trade finance is one of the oldest jobs in

banking. Millennia ago merchants in pre-

sent-day Turkey exchanged cloth or copper

for engraved tablets promising a later pay-

ment in silver. Trade credit today may be

more sophisticated, but it still tackles the

same problem: that exporters prefer being

paid at the time of sale (so they can finance

more production), whereas importers

would rather settle up after receiving the

goods (so they can first raise the cash by re-

selling them). Each side rarely trusts the

other to keep its end of the bargain.

Trade finance places banks in the mid-

dle. Typically, the importer’s bank, once

presented with a shipping bill or other

proof, issues a “letter of credit” to the ex-

porter guaranteeing payment. This allows

the exporter to obtain credit from a bank,

and then to repay the lender when the ulti-

mate customer pays up. The loans are

short-term, usually less than four months.

ISTANBUL, LONDON AND NEW YORK

The world’s oldest, biggest and most intricate paper trail is about to be ripped up

Trade finance

Time’s up

A

t the endof September Sabine Lau-
tenschläger, the most senior German
official at the European Central Bank (ecb),
unexpectedly resigned from the bank’s ex-
ecutive board, years before her term was
due to end. She gave no reason for her de-
parture, but is known to have opposed the
bank’s decision, announced last month, to
resume its bond-buying programme until
inflation neared its target of close to, but
below, 2%. If that opposition was why she
stepped down, it would make her the third
German official to quit over bond pur-
chases. In 2011 both Axel Weber, then head
of the Bundesbank, and Jürgen Stark, a
member of the ecb’s executive board, left
over an earlier asset-purchase scheme.
The controversy over the ecb’s latest
round of stimulus, which also cut interest
rates to -0.5%, has heated up. Current and
former central bankers in both Germany
and other northern countries have at-
tacked the decision to resume bond-buy-
ing. Bild, Germany’s biggest-selling tab-
loid, has accused Mario Draghi, the ecb’s
boss, of sucking people’s savings dry. Mr
Draghi’s term ends on October 31st. Chris-
tine Lagarde, the former boss of the imf, re-
places him.
Perhaps signalling a desire to cool
things down, Germany’s government an-
nounced on October 23rd that Isabel Schna-
bel, a member of its council of economic
advisers, would replace Ms Lauten-
schläger. Ms Schnabel, who is also a profes-
sor at the University of Bonn, appears more
pragmatic than those who have thrown in
the towel. She has repeatedly warned poli-
ticians and bankers of the dangers of tell-
ing the public that the ecbis stealing their
savings. In an interview with Handelsblatt,
a German daily, she pointed to Brexit as evi-
dence of the risks of making the European
Union (eu) a scapegoat.
Ms Lagarde will probably be glad to have
a more conciliatory German at the ecb. All
together the central banks of countries ac-
counting for more than half of the euro
zone’s economic output opposed the
bank’s stimulus package. (Few economists,
though, were expecting any change to poli-
cy at its meeting on October 24th, after The
Economistwent to press). Banks hate nega-
tive interest rates because they feel they
cannot pass them on to customers, mean-
ing their net interest margins are
squeezed. Christian Sewing, the boss of
Deutsche Bank, Germany’s biggest lender,

says that Strafzinsen (punitive interest

rates) will eventually destroy the financial

system. Ms Lagarde faces the unenviable

task of winning these critics over.

Some German bank-watchers would

probably have preferred that Jens Weid-

mann, the hawkish boss of the Bundes-

bank, was picked to succeed Mr Draghi. A

few worry that, as a former French finance

minister, Ms Lagarde might further politi-

cise matters by pursuing policies that are

redistributive across borders, rather than

sticking to the ecb’s price-stability man-

date. But some hawks hold out hope that

Ms Lagarde might change the bank’s policy.

Some see her promise to review the bank’s

strategy as an opening to rethink its com-

mitment to stimulus. And as she is not a

trained economist, they reckon she might

prove more pliable than Mr Draghi.

In her 78-page-strong responses to

questions from the eu parliament, she

wrote that she wanted to restore trust in the

ecb by communicating more with the pub-

lic, and by listening to the young and civil-

society organisations. A headline in Bild

asked whether life for German savers

might improve after she takes the helm.

Ms Lagarde might do well, though, to re-

member Mr Draghi’s experience with the

German press. When the Italian took

charge eight years ago, Bild pronounced

him a “proper Prussian” and gave him a

spiked Prussian helmet. Only a year later,

after Mr Draghi had allayed fears of a euro-

zone breakup by saying he would do “what-

ever it takes” to preserve the single curren-

cy, Bildasked for its helmet back, com-

manding: “No more German money for

bankrupt states, Herr Draghi.” He has had a

tricky relationship with the euro zone’s

biggest member ever since. 7

BERLIN
Germany has mixed feelings about the
bank’s new boss

The European Central Bank

A spiky

relationship

On her Lagarde