A seizure in trade financing threatens the world economy and big banks must begin lending again soon to avoid 'horrendous' consequences, a senior official at the World Trade Organisation said on Friday.

Richard Eglin, director of the trade finance division of the WTO, said big banks like Citigroup and HSBC were preparing to gather in Geneva on November 12 for a crisis meeting with WTO officials ahead of a G20 summit in Washington two days later.

Trade officials and the banks hope to reinvigorate a $10 trillion market for short-term lending used by exporters and importers to cover costs of shipping everything from soyabeans to auto parts.

'It is essential that liquidity is injected into this market,' Eglin told Reuters on the sidelines of a World Economic Forum meeting held in Dubai.

'We've seen the cost of credit go up, and that's if you can even get ahold of it,' he said.
'That's causing real friction.'

Banks and the WTO will assess the depth of the crisis and devise solutions, and may take a request to the Washington meeting, he said, where some European leaders hope to launch an overhaul of the global financial architecture.

The consequences to stalled trade finance are already apparent, Eglin said, with shipments delayed and exporters struggling to find short-term loans.

'Trade stops. The conseqences of that are horrendous. It's clearly essential,' he said.
Developing countries are suffering the most from the stalled trade finance market, which is concentrated in the hands of the world's biggest banks such as J.P. Morgan, Royal Bank of Scotland,, Commerzbank and ING.

'The solution is, at the end of the day, with the banks,' Eglin said.
Around a dozen banks are expected at the meeting.

Roughly 90 percent of the $14 trillion annual world trade volume is financed by credit, drawing on simple and traditional banking instruments dating back to the Middle Ages.

But bankers say they are running out of capacity for trade finance. The price of financing has shot up, squeezing some exporters and importers, especially from developing countries, out of the market.

Efforts by the International Financing Corporation, the World Bank's investment banking arm, to get trade finance flows moving again are welcome but, at around $2 billion, represent a 'drop in the ocean' in the multi-trillion-dollar market, Eglin said.

In October, Brazil's government announced it would use its foreign reserves to increase credit lines for exporters who have been finding it hard to get trade finance.

The WTO has invited the heads of the International Monetary Fund, the World Bank, regional development banks and the Berne Union of export credit and investment insurers to the meeting.-Reuters