* Trade finance recovery bypasses poor countries
* Threat to development
* Regulatory change exacerbates problem
By Jonathan Lynn
GENEVA, Oct 22 (Reuters) - Many developing countries remain cut off from trade finance, which before the credit crunch was often their only source of private-sector funding, despite a recovery in the industry, a meeting of experts heard on Friday.
Difficulties still encountered by some poor countries in Africa, Asia, Latin America, Eastern Europe and Central Asia to obtain funding for their exports threatens to undermine their entire economic development, one expert said.
"For them it's an important lifeline with respect to development," said the expert, requesting anonymity, after the meeting of commercial and development bankers active in trade finance hosted by the World Trade Organization.
Trade finance -- the lifeblood of global commerce -- dried up in late 2008 and early 2009 amid the broader credit crunch, contributing to a 12 percent decline in global trade volumes in 2009, the biggest contraction since World War Two.
The industry, which underpins 60-80 percent of the $12-13 trillion in merchandise trade, has recovered since the G20 agreed at its summit in London in April last year to mobilise up to $250 billion to revive the sector.
But even as trade expands by an unprecedented 13.5 percent this year, banks are concentrating on the safest customers.
Countries finding it hard to access trade finance include Vietnam, Pakistan and Bangladesh in Asia, some 20 countries in Africa, 5 low-income states in central and southern America, and Ukraine and Kazakhstan, the trade finance expert told reporters.
WTO Director-General Pascal Lamy is likely to raise the issue at next month's G20 summit in Seoul and on Oct. 27 when he attends a meeting of the African Development Bank in Tunis, trade sources said.
RISK AND REGULATIONS
Current and proposed regulations are discouraging banks from providing trade finance to developing countries because they increase the amount of money banks must set aside to cover risks, making the low-margin transactions unprofitable.
"There comes a point at which the cost of doing business ... is just not worth it," said the trade finance expert.
Under current banking regulations, known as Basel II, banks must set aside capital according to the risk of the country they are lending to, not the corporate customer. In many developing countries, companies -- especially those selling commodities and raw materials -- have much better credit ratings than the state.
Proposed new rules known as Basel III, intended to prevent banks hiding toxic assets off their balance sheets -- one of the causes of the financial crisis -- also penalise trade finance because its traditionally safe instruments such as letters of credit are held off-balance-sheet.
The irony is, bankers argue, that trade finance is much safer than other forms of credit.
That was long a matter of faith and anecdote, but nine leading trade finance banks have now pooled data on trade finance to demonstrate to regulators just how safe it is and argue for a change in the rules.
A trade finance default register, set up by the International Chamber of Commerce (ICC) and Asian Development Bank, collected 5.2 million transactions over 5 years, worth $2.5 trillion.
The database shows only 1,140 transactions defaulted -- a default rate of 0.02 percent, compared with rates of several percentage points on real estate lending.
Even in those cases 60 percent of the money was recovered as trade finance lending is secured on the underlying shipment.
Banks attending Friday's WTO meeting included BNP Paribas, Citibank, Commerzbank, HSBC, JPMorgan Chase , RBS, Standard Chartered and Tokyo-Mitsubishi. (Editing by Stephanie Nebehay/David Stamp)