Trade & Forfaiting Review

Writing a series of articles on forfaiting and trade finance.

Powerhaus

Filed in: germany, abs, kfw, ifa, forfaiting, greek, berlin, china, thyssenkrupp, ipex

Berlin may have been the venue for this year’s annual IFA Conference, but Germany has even bigger matters to celebrate. Richard Willsher speaks to German bankers about the country’s spectacular export-led growth and the role of trade finance.

TFR Germany-October 10

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Powerhaus
Berlin may have been the venue for this year’s annual IFA Conference, but Germany has even bigger matters to celebrate. Richard Willsher speaks to German bankers about the country’s spectacular export-led growth and the role of trade finance.

On 9 November 1989, the checkpoints along the Berlin Wall were opened for good, followed by the signing of the Treaty of Unification on 3 October 1990. Since then, 3 October has been celebrated in Germany as Tag der Deutschen Einheit – German Unity Day.

It has been a long haul, but the German government has succeeded in carrying through a major, long-term vision for the future of a united Germany.

The same, perhaps, can be said of their economic management. Despite bearing the pains of integration and, more recently, the financial crisis, bank rescues and being called upon to play the lead role in bailing out the Greek economy, Germany has been working hard at its recovery that has been largely, though not entirely, export-led.

The result: in the second quarter of this year the economy grew 2.2%, the fastest quarterly rise since reunification. And as The Economist reported on 13 August, it is China, among other emerging markets, that is buying a lot of German products. For example, sales of Mercedes cars to China tripled in the year to July and ThyssenKrupp, the steelmaker, has raised its outlook for year after better than expected demand from the automotive and engineering sectors.

Germany’s trade finance bankers have played their part. In fact, they have been rushed off their feet. “The German banks are doing fantastic business,” says Silja Calac, Head of Trade Risk Management at Unicredit in Munich.

“Our forfaiting volume has grown. It began with the crisis. The years 2008 and 2009 were good for us. First, income increased considerably because the pricing went much higher and now the pricing is going down but the volumes are over-compensating for this decline,” says Calac.

She adds: “Our volumes have continued to grow in 2010. In the first half of the year, bank guaranteed forfaiting increased much more compared to the first six months of 2009. Small and medium-sized enterprises (SMEs) in Germany were hit by the crisis and feel a greater need to make their businesses safer and get cash immediately, and forfaiting can provide that.”

Fortunately, many German corporates have a long familiarity with forfaiting, which therefore forms part of their financial planning.

Volume and profits
Former IFA board member and senior specialist in trade finance at Commerzbank in Frankfurt, Waltraud Raderschall, agrees. “I don’t think that any of us can complain about the volume and profits in the business. I wouldn’t say that it is booming but we can see any amount of business, any time of the day.”

She goes on to describe the state of the market: “From the larger firms there is a huge request for supplier credits down to the smaller SMEs. Then there are the government programmes with the German export credit agency (ECA) providing plenty of insured possibilities. There has also been a change in the policy of the private risk insurance companies. The self-retention portions have often improved, depending on the risk covered. Then there are the risk limits within the banks to cover political and commercial risk. Combine all of these and we are at a very interesting moment because everything is emerging at the same time.”

Supporting the export-led recovery has not been all plain sailing for German trade financiers however. “Trade finance is essential, even for SME business,” says Bernd Sooth, Vice President of Financial Institutions Trade and Commodity Finance at IPEX Bank in Frankfurt, “but there is a gap between the potential of the market and the willingness among the banks to provide support,” says Sooth.

He adds: “Businesses need more from the banks, but they can’t provide all the services that customers need. This is due to the risk policies of the banks due to the fact that there have been huge mergers and much consolidation within the banking sector…. That is a problem for the SMEs that are looking for new partners in trade finance business because they prefer to work with German banks rather than to seek out
partners in other countries.”

Stephan Schneider, who heads structured export finance at BHF Bank in Frankfurt, notes that there are currently discussions ongoing in Berlin to try to alleviate the problems faced by SMEs. One proposal, for example, is that insurers and ECAs could improve insurance provisions for small companies’ trade debts, which would enable them to more easily discount them with banks that do not have banking lines in place for such small firms.

The consolidation of the banking market and the stringent controls on lines and limits has created space for other players to enter the market – not just smaller, non- bank forfaiting houses, but also firms keen to structure asset-backed securitisations (ABS). “We see new products which are competing, but which are not really different from forfaiting. Since I would call forfaiting a technique to liquidate illiquid assets, such new products are variations of forfaiting. ECA-covered supplier finance, electronic platforms and non-guaranteed supply chain finance are all part of the ‘German way of forfaiting’,” says Calac.

“Forfaiting has evolved a lot over the last few years adapting to the more sophisticated requirements of our customers and to new technological possibilities,” she continues, “supply chain finance structures through electronic platforms are such a variation of forfaiting. However, since the beginning of this year we have seen growing competition from ABS structures for our supply chain finance products. As this activity had been very strongly deleveraged following the financial crisis, securitisation teams are now looking for new and relatively safe assets. They seem to find them in trade finance, offering structures to the bigger corporates whereby they buy up all of their trade related assets, put them in a conduit and by this method offer corporates cheaper funding.”

Meanwhile, Raderschall says that banks are trying to learn the lessons of the crisis, though some things have been adjusted. “There is confidence here. In the old days a client would just show you the deal. They wouldn’t consider any other alternative; they would just do it. But now people shop around and they are met with different policies, different possibilities. That is why we say that there is an increase, but also change, in the way business is being done.”

Looking to the future, Calac concludes: “I think German industry has a good time ahead of it. There is strong technical knowledge and excellence that goes into German exports. Germany has benefited from increased investment in heavy equipment by overseas customers after a reduction in investment in various markets during the crisis… We will continue to expand our trade finance activities to support exports and imports. We hope regulators will appreciate the importance of trade finance for the German economy and will accept the argument for preferred capital allocation rules for trade finance, which is jeopardized by the new regulatory environment of Basel II and III.”

Sooth agrees: “For the future I think there will be growth, but I think it will be tight.”

For the time being, there is plenty of business to go around and the traditional trade finance banks can celebrate the country’s 20th anniversary and its strong export-led economic performance. Longer term they have to grapple with the consequences of Basel III and come to terms with stringent profitability criteria, but that will be another story.

Sconto Pro Soluto

Filed in: forfaiting, banking, turkey, china, export, iran, discount, italy, finance, simest

You don’t need to be around for long before you become aware of how influential Italian forfaiters are in the forfaiting market. The obvious question to ask is, why?

TFR Italy-November 10

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Sconto Pro Soluto*

You don’t need to be around for long before you become aware of how influential Italian forfaiters are in the forfaiting market. The obvious question to ask is, why?
by
Richard Willsher

These are not great days for Italian forfaiting, but the market could be on the turn. “A fair percentage of the Italian exports of capital goods is made up of machinery and equipment, supplied by medium-sized companies to medium- sized buyers in emerging markets,” says Giancarlo Parente of Simest, the Italian government entity that provides export-credit interest support programmes. “The average size of export contracts does not lend itself to the use of syndicated buyer credits, which are too complex to structure and to handle. The simplicity and speed of forfaiting is, therefore, particularly welcomed by Italian businesses,” he adds.

Enrico Seralvo, Managing Director of Intesa Soditic in Milan, adds that forfaiting has been in use in Italy for decades and remains as relevant as ever. He recalls a time when accessing export credit insurance cover through Italian export credit agency (ECA) SACE was much less efficient than it is today. Moreover, in those days it was not possible to assign SACE policies without recourse. Therefore forfaiting, especially involving banks operating outside of Italy, was the most efficient way of ensuring Italian exporters could avoid the payment risks of offering medium-term credit in support of their equipment sales.

Troubled times and changing terms
A lot has changed since those golden days when interest rate subsidies were richer than they are today, but forfaiting remains relevant, says Parente. “Over the past decade the forfaiting scheme has supported roughly a yearly average of €2.3bn of business,” he says. Yet Italy has been through troubled times over the past couple of years, along with all of the other major economies of the western world.

The years 2008 and 2009 both witnessed declines in exports of Italian capital goods. This year has seen a modest increase, although the strength of the euro against the US dollar is not helping. Paolo Jelmoni of Treviso, Veneto-based brokers and advisors Reginato & Mercante is moderately optimistic that this will improve, as is Raffaele D’Alo of Eufintrade in Lugano, Switzerland.

“Today the market is very depressed,” says D’Alo. “However, it seems that something is moving and there is some increase in exports to China, Turkey and elsewhere in the Far East, albeit that these transactions are supported by short-term letters of credit. And I have to say that there are a lot of requests for ‘silent confirmation’ or discount of usance letters of credit issued by Iranian banks.”

This represents a general shift away from traditional discount of promissory notes and bills of exchange in favour of deferred payment letters of credit (LCs). Many of these are simply discounted by local Italian banks and held in their books until maturity.

Paolo Jelmoni says that banks in some of the larger emerging markets have plenty of liquidity and are therefore tending to assist their importing customers with local facilities. This means that Italian exporters may simply be paid at sight, without the use of LCs or medium-term financing.

In addition, he notes that Italian exporters are increasingly requesting capacity to discount corporate names without the support of bank guarantees. This also tends to impair the liquidity of the market, as there are fewer counterparties to buy such paper. In particular, banks are increasingly constrained by tightening capital and liquidity regulation.

Moreover there is increasing competition from SACE. Jelmoni notes that it has become much more efficient and aggressive. It can now give approval for medium-term credit cover in the space of a week, which makes it a staunch competitor for traditional brokers of forfaiting deals.

New demands
Nevertheless, Eufintrade’s Raffaele D’Alo says that he remains optimistic about the future development of forfaiting. “Based on my own experience, I have personally seen several crises in the market. Each time the question arises, ‘will forfaiting survive?’ But we are still here talking about this product and the number of participants at the IFA Annual Conference increases year after year. I do believe, however, that the market should change its approach towards corporate risk transactions, because they represent the highest percentage of the enquires that we see from Italian exporters.”

So while it looks as if the nature of the demand for forfaiting support has changed, the forfaiting technique itself remains as popular in Italy as ever. There, as in the rest of the international banking and trade finance community, the long shadow of the 2008 crisis still darkens the picture. Whether tighter credit terms will now be a fact of life as the demands of Basel III take hold, or whether forfaiters will find new ways to do business, we will have to wait and see.

But the chances are that Italian forfaiters, and transactions structured to support exports of Italian goods, will continue to be significant features of the international forfaiting market, as ever.

Richard Willsher is a financial journalist and trainer, perhaps best known for the seminars that he conducts with the IFA. He can be contacted by emailing rdw@richardwillsher.com.

For more information about the International Forfaiting Association see: www.forfaiters.org or e-mail info@forfaiters.org.

* In English: ‘discount without recourse’

One step closer

Filed in: trade finance, ifa, forfaiting, international forfaiting association, uniform rules for forfaiting, uniform customs and practice for documentary credits, urf, ucp, payment

Uniform Rules for Forfaiting have moved a step closer following the third meeting of the Drafting Group in late January 2010.

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One step closer

Uniform Rules for Forfaiting have moved a step closer following the third meeting of the Drafting Group in late January.
by
Richard Willsher

Following a third meeting of the Drafting Group in London in January, Uniform Rules for Forfaiting (URF) are a step closer. Dubbed the
UCP of forfaiting, the new rules are likely to affect everyone involved in the market.

Although a delivery date for a set of global rules to act as a standard for forfaiting is not cast in stone, the committee has in mind a broad target date of autumn 2011. However, Drafting Group Chairman Don Smith emphasises that, “We are working towards a quality product, not to a predetermined deadline just for deadline’s sake.”

The Drafting Group is comprised of ten members, five each from the International Forfaiting Association (IFA) and the International Chamber of Commerce (ICC). The ICC is the body which, among other things, publishes the Uniform Customs and Practice (UCP) for Documentary Credits, which has been the bible for letter of credit (LC) transactions since it was first conceived in 1933, and which has been though a series of revisions since then.

Based on market practice
URF does not have more than three-quarters of a century of evolution to build upon, but it does have as its basis three documents produced by the IFA over the past six years that were firmly grounded in long-term market practice.

The Introduction to the Primary Forfaiting Market, the IFA Guidelines [for the secondary forfaiting market], and the User’s Guide to the IFA Guidelines form the foundations for the rules, which will be quite different in style. This is because the Drafting Group has decided at the outset that they will not be written as an educational document, nor will they take the form of a commentary on the previous documents. Moreover, it is worth bearing in mind that they will be rules, not law, the same in status as UCP.

The aim is to keep it simple, using language that will enable words and concepts to be easily translated. “It comes down to a question of the language of the business,” says Smith. “This is one of the things we’re focusing on. As we work through writing the rules we use the language of the business. We want to ensure that we are not creating new terminology; that we are working with things that are acceptable to users in the business already. And while this is aimed at those already involved in the business, it will also be of great assistance to facilitating the future development of those new to it.”

In addition, the aim of the rules is to be of use to all market participants. “We are taking an approach of one set of rules for both primary and secondary markets. So the secondary market should benefit from having rules for the primary market. and the primary market should benefit because it will make instruments more readily saleable in the secondary market,” adds Smith.

Disputes
Another of the key benefits the rules can bring is in the context of disputes. Although they are not laws and transactions will continue to be subject to governing law, they can provide direction to regulators and to courts. “Courts are generally willing to lookat rules of practice, particularly if those rules of practice have been incorporated into the transaction,” says Smith. “So if there is a transaction and it says ‘subject to Uniform Rules for Forfaiting’ and there is a disagreement and this ends up in litigation, I would expect that courts would look for assistance and guidance wherever they can find it. And if a transaction subjects itself to the URF, that they will go to the URF to see what it has to say.”

Looking ahead to the conduct of the market itself, it was one of the clear intentions of both The Guidelines and the primary market documents to provide guidance to newcomers to the forfaiting market. The Rules will codify market practice just as UCP has long done for LCs.

Smith believes that they will help facilitate a degree of standardisation of transactions that derive from areas such as the emerging markets of the Far East and elsewhere and so enable them to be structured and sold into the secondary market more easily.

He adds: “A good, solid set of rules should also lead to improved pricing for clients because not every deal has to be a one-off, start-from-scratch deal. This provides the facility to bring new products to the market in a regular, standardised manner, and the market will know that it is subject to URF and that a number of points have already been considered by the primary forfaiter.”

Certainty
Another key benefit will be certainty. Removing uncertainties from the way in which transactions are structured, where risk lies and who is responsible for it, will promote the adoption of forfaiting by a wider banking community that is concerned with risk management. This may, in the long term, mean that larger transactions can be constructed with confidence and that turnover in the market will increase.

This is why URF will be welcomed by forfaiters and those who make use of the market to provide or receive medium-term trade credit. And this also suggests that, therefore, everyone in the market is likely to be affected by new rules of the type that have long lent discipline to the large, global LC business that is a well-tried and tested staple on the trade finance menu.

Richard Willsher is a financial journalist and trainer, perhaps best known for the seminars that he conducts with the IFA. He can be contacted by emailing rdw@richardwillsher.com

For more information about the International Forfaiting Association see: www.forfaiters.org or e-mail info@forfaiters.org

Forfaiting -  the last ten years

Filed in: trade finance, ifa, forfaiting, international forfaiting association, crisis

A look back at the events and challenges of the past decade in forfaiting.

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Forfaiting -  the last ten years

Richard Willsher looks back at the events and challenges of the past decade in forfaiting.

The International Forfaiting Association’s (IFA’s)Rome conference from 2nd to 4th Septembert coincides with the Association’s 10 anniversary. It also coincides with the current financial crisis. But the history of forfaiting over the past decade has been one of encountering and overcoming one predicament after another.

“Every crisis has had an impact on the market,” says Waltraud Raderschall of Commerzbank AG. “For example, major events or reschedulings led to definite changes in documentary requirements for deals originated in the area concerned. They may also be the reason why market participants sometimes would look twice at documentation evidencing the claims they intend to purchase on a discount without recourse basis.”

These are just two examples Raderschall refers to from a forfaiting career that spans more than 20 years. As she prepares to step down from the IFA’s Board at this year’s conference after a six-year stint, she notes that the result of dealing with each period of turbulence in the market has been one of learning and adapting to new aspects of the business.

It became clear, however, with the arrival of new market participants who did not necessarily appreciate the way business had traditionally been carried out, that the forfaiting community had to decide whether it would become externally regulated or whether it would do the job itself. This led to the secondary market IFA Guidelines being drawn up. And though, adds Ms Raderschall, they are not used as they were originally intended, they have become a valuable point of reference.

IFA’s influence
The IFA itself has achieved much of what it was established to do ten years ago. Among other things, Article 2 of its 4th August 1999 Statute lists the aims of the Association as being to, “promote good relations amongst its members and to provide a basis for joint examination and discussion of questions relating to the forfaiting business; to issue rules and make recommendations regarding the conduct of such business; to provide services and assistance to participants in the forfaiting business”. All of these things it continues to do.

Market participants note that over the years the forfaiting market has seen a variety of instruments become popular and then lose their appeal. A number of standard instruments, including supplier credit structures, discounted letters of credit and promissory notes, book receivables, promissory note facilities and bundling transactions have came into vogue – and subsequently waned in popularity. But in the current crisis, there has been a definite withdrawal from more creative structuring and a return to letters of credit (LCs), once again. Some see this as a negative development.

Sal Chiappinelli, CEO of SFC Swiss Forfaiting, based in Zurich, laments this change in the market place. As he also prepares to bring to an end his six-year IFA Board term, he says that the move has enabled large banks to dominate because they can act as issuers or confirmers or advisors of credits. Their fees are assured and there is less scope for smaller, more agile and, perhaps, more creative players to perform a role in the market.

Meanwhile, he adds that the insidious influence of injunctions preventing payment being made under LCs has had the effect of weakening the strength and integrity of the credit instrument, as a number of forfaiters are currently finding to their cost. In this regard, he supports the recent co-operation between the IFA and the International Chamber of Commerce, which may lead to the establishment of rules for conducting forfaiting including, hopefully, receivables arising from deferred payment LCs.

Global reach
Geographically, forfaiting has continued to spread and embrace new areas of the world. There has been a continuous stream of new risk countries, additional sources of transactions and budding local forfaiting marketplaces. It has, for example, been ten years since Charles Brough, who heads forfaiting and trade finance in Asia/Pacific for UniCredit Markets and Investment Banking, moved to Singapore to start a forfaiting desk. Since then, Singapore has steadily grown into an active marketplace in its own right, spanning the Asian theatre.

Brough notes that in his early days in South-East Asia, half of the business he saw derived from financing Japanese exports to neighbouring countries. South Korea became an active market but then waned, as did Japan. But Chinese exports then became the principle driver for the market from about 2002 onwards.

He confirms that, for the time being, new business in the region, as in other parts of the world, almost exclusively takes the form of deferred-payment LCs. And he and others watch the current developments in both Kazakhstan and the Middle East with some concern as the consequences of the most recent crisis buffet the market.

But some things have remained constant throughout the past ten years. According to Waltraud Raderschall, the market remains small, but by no means exclusive. And it is still the case, in her view, that market participants are willing to help each other with education, in sharing information and getting through difficult times.

The IFA’s education seminars and annual conferences have extended this trend by enabling networking and new contacts to be made. This bodes well for the future and, as happened over the past ten years, the market will continue to adapt to events on the world stage and learn to do business in the changing environments they bring about.

What a difference a year makes.

Filed in: ifa, forfaiting, international forfaiting association, kazakhstan, lehman, 2009

A look back on a traumatic year for forfaiting and trade finance – and to the challenges that lie ahead.

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What a difference a year makes

RICHARD WILLSHER looks back on a traumatic year for forfaiting and trade finance – and to the challenges that lie ahead.

There has rarely been a more difficult start to a year. 2009 opened in the aftermath of the collapse of Lehman Brothers and the paralysis of the financial markets that followed. Those first months of the year were very difficult ones for trade finance in general and for forfaiting in particular, yet, as the year closes, the picture seems much brighter.

It is noteworthy that during the year, the forfaiting market has shown an overwhelming preference for deferred, trade letters of credit. Financial, non-trade transactions with innovative structures and non- traditional documentation took a back seat. Trade finance was the name of the game.

“Although the deep crisis in the banking sector appears to be over, many banks are still going through difficulties, even now,” says International Forfaiting Association (IFA) Chairman Paolo Provera. “However, turnover in trade finance at a lot of institutions has increased during the year. While trade finance staff have, in general, been reduced across the board there has quite clearly been a need for banks to support their trade finance customers. Consequently, trade finance specialists are now in demand to support exporters. There is a demand for know-how. For these reasons 2009 has turned out, in the end, to be a good year for trade finance.”

The bounce back has been more pronounced in North America. “In the New York market we’ve had a terrific year,” says Brendan Herley, President of The Association of Trade and Forfaiting in the Americas (ATFA). “In this hemisphere in general, the leading banks, such as Bank of America, Bank of Montreal, TD Bank, Banco do Brasil, Itau and Santander, have beaten their budgets.

“Even the medium-sized players such as Mashreq Bank and National Bank of Pakistan have had a good year in the US by servicing their trade finance clients. Overall, a number of players have come back into the market as liquidity has increased. And they’ve started to fund transactions again, rather than being unfunded participants. In the past few months the liquidity premium that all banks were confronted with has reduced to almost insignificant levels,” he says.

In Asian markets it has been a similar story. “Margins are falling, especially in Singapore,” says IFA board member Charles Brough, Director and Head of Forfaiting & Trade Finance (Asia Pacific) for UniCredit. “There is a general view that Singapore margins are lower than other places because there are too many banks here, competing with each other for a limited amount of business. During 2009, the situation has loosened up and people have come back to doing trade finance. More banks are prepared to take trade risk now than they were.”

All good news, but Bernd Sooth, who leads trade and commodity finance at Frankfurt-based KFW IPEX-Bank, strikes a note of caution. “2009 was a challenging year for trade finance. A few very important markets in Eastern Europe crashed and, therefore, the appetite of risk management reduced for trade finance. The most important example was the Kazakh situation where the trade finance ‘golden rule’ looked as if it would be broken. Fortunately, BTA Bank has granted preference to ‘true trade’ finance debt. This is good news for trade finance and, for the moment, the overall market has become less stressed.

“However, Dubai may cause us problems again. It could lead to a further crisis because a lot of money has been lent by the banks. The past few weeks have been better and margins have come down a little bit and the appetites of the international players seem to be increasing. But I’m not really sure how the events in the Middle East and North Africa region will affect this,” says Sooth.

The events in Kazakhstan have been closely monitored by the IFA. In particular, the IFA’s Deputy Chairman and Legal Advisor, Sean Edwards, has played a vital role tracking developments with Alliance and BTA.

The recent completion of the Alliance trade finance adjudication process and the publication of BTA’s restructuring term-sheet show differing approaches to the treatment of trade finance creditors, with BTA behaving arguably less favourably towards them.

But in both cases the emphasis has been on showing that the financing is attached to identified imports or exports. The protection of trade finance’s preferred status may well have far reaching and positive consequences for the way in which trade finance is regarded by banks and regulators in future. Nevertheless, Dubai now casts a shadow over the financial markets with consequences, as yet, unknown for trade finance in 2010.

“For trade and commodity finance, 2010 will also be a difficult year,” continues Sooth. “The market may still be limited, and the capital and availability of liquidity at some financial institutions may also be limited. They may have to do some provisioning again and raise a bit more equity to have a buffer next year. I think, therefore, that the market will remain tight. I think that the first half of the year will be tough again.”

However, Sooth foresees good structured-trade finance opportunities for exports of soft commodities from Brazil, in particular, and suggests that European Union exports to China and India could well make the second half of 2010 very interesting for banks involved in trade finance in the EU.

Interestingly, Brough’s UniCredit forfaiting and trade finance team is moving from Singapore to Hong Kong next year, endorsing the hopes and expectations of many surrounding increased trade flows in and out of the People’s Republic. He stresses that trade finance banks will continue to have strong interest, post- Kazakhstan, in financing real trade. ‘Synthetic’ trade transactions will play a more limited role than in the past, believes Brough.

Not surprisingly, Herley is also bullish about the outlook for 2010. “As far as ATFA is concerned, the market will grow. We’ve got a lot of momentum because more and more people in the mid-sized corporate world need trade finance solutions. So the number of players in the trade finance market will increase. I would also add that the Chinese [banks] are here to stay and people should take note if they haven’t done so already.”

IFA chairman Paolo Provera concludes by saying that he sees trade finance increasing in 2010 as confidence grows among exporters enabling them to grow their overseas sales. “2010’s Berlin conference in September will be the big IFA event of the year, the first since the end of the crisis. The outlook is positive for exports, if negative for credit. Trade finance and forfaiting are still alive, despite the crisis…”␣

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