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ANALYSIS-Financial crisis squeezes trade credit
Editor: eveguo
7 Nov 2008
GENEVA, Nov 7 - The financial crisis is squeezing the trade credit that oils the wheels of commerce, forcing exporters and importers to pay stratospheric prices for the loans that allow them to ship their goods.
But while anecdotal evidence abounds of ships riding empty outside harbours and goods stuck on the quayside, it is hard to find actual cases of exporters unable to ship their products.
"We're not getting the examples per se of it being stopped. We've got concerns being expressed about the difficulty of obtaining liquidity," said Australian Trade Minister Simon Crean.
Crean noted that merchandise trade was by no means the only sector finding it hard to get funds in a crisis that has dried up sources of credit but said the squeeze was undermining efforts to use trade as a stimulus for the world economy.
"The difficulty in obtaining finance for transactions that are committed to acts as a disincentive to the very thing that we're trying to get going and that is the freer flow of trade," he told Reuters. In Chicago, one grain trader said his firm had been readying for the worst but so far the crisis did not appear to have stopped any grain shipments.
"We are loading stuff out and they are paying in a timely manner. (There has been) no hold up on sales because of letters of credit. They talked about it as a possibliity but so far it is not an issue," he said.
ANECDOTAL EVIDENCE
But there is anecdotal evidence that trade has been stopped.
"With reports of sellers' banks deciding they don't trust the financial institutions named in buyers' letters of credit, have come alarming anecdotes of cargo ships being stuck in home ports," Matt Robinson, an economist at Moody's Economy.com, said in a report last month.
Around 90 percent of the $14 trillion in world merchandise trade is funded by trade finance, such as letters of credit -- traditional banking instruments dating to the Middle Ages.
Because, in contrast to the sophisticated credit derivatives underlying the crisis, they are simple, short-term and backed by a tangible collateral -- the cargo they are funding -- they have proven more resilient than other forms of lending.
But the credit crunch, by drying up liquidity, pushed up prices, and already a month ago trade finance deals were being offered at 300 basis points over interbank refinancing rates, three times or more the going rate a year earlier.
"Our problems to obtain financing didn't start in September. Big banks have been reluctant to hand out credits for shipping for one or two years," Alain Solal, president of CAM Cereales, a large French grain exporter to North African countries.
"We have seen all the traditional banks become more fussy, more greedy. They argued that they could make more money elsewhere. We can see where that led," he told Reuters.
Solal said banks had been asking for ever tougher and unacceptable terms, while customers were seeking longer payments periods because they were having trouble raising finance from their banks.
He did not cite any deals that had fallen through for lack of trade credit, but expressed concern that measures to revive the banking system would not feed through into trade finance.
The World Trade Organisation (WTO) has called a meeting for Nov. 12 to discuss the availability and affordability of trade finance.
Besides the International Monetary Fund and World Bank, it has invited regional development banks, the Berne Union of export credit insurers, and five banks active in trade finance -- Citigroup, Commerzbank, Royal Bank of Scotland, J.P. Morgan Chase and HSBC.
The tension in the market is reflected in the Baltic Exchange's Dry Index, a measure of the cost of moving raw materials by sea, which fell to a nine-year low on Tuesday having plummeted 11-fold from its record high in May.
More than 80 percent of international trade in goods is carried by sea, and the index, which measures the cost of shipping bulk commodities like grain, iron ore and coal, has crashed as the financial crisis and emerging recession has hit demand for vessels.
In these conditions, developing countries are most exposed.
Brazil said last month it would use its foreign reserves to increase credit lines for exporters finding it hard to get trade finance.
Sri Lanka has secured a credit line to pay for crude oil, who supplies 90 percent of its needs.
Thailand, the world's biggest rice exporter, is planning to barter rice for oil from Iran -- a sign that the crisis is forcing countries to return to trading methods that predate even the Middle Ages.
Editor: eveguo
7 Nov 2008
GENEVA, Nov 7 - The financial crisis is squeezing the trade credit that oils the wheels of commerce, forcing exporters and importers to pay stratospheric prices for the loans that allow them to ship their goods.
But while anecdotal evidence abounds of ships riding empty outside harbours and goods stuck on the quayside, it is hard to find actual cases of exporters unable to ship their products.
"We're not getting the examples per se of it being stopped. We've got concerns being expressed about the difficulty of obtaining liquidity," said Australian Trade Minister Simon Crean.
Crean noted that merchandise trade was by no means the only sector finding it hard to get funds in a crisis that has dried up sources of credit but said the squeeze was undermining efforts to use trade as a stimulus for the world economy.
"The difficulty in obtaining finance for transactions that are committed to acts as a disincentive to the very thing that we're trying to get going and that is the freer flow of trade," he told Reuters. In Chicago, one grain trader said his firm had been readying for the worst but so far the crisis did not appear to have stopped any grain shipments.
"We are loading stuff out and they are paying in a timely manner. (There has been) no hold up on sales because of letters of credit. They talked about it as a possibliity but so far it is not an issue," he said.
ANECDOTAL EVIDENCE
But there is anecdotal evidence that trade has been stopped.
"With reports of sellers' banks deciding they don't trust the financial institutions named in buyers' letters of credit, have come alarming anecdotes of cargo ships being stuck in home ports," Matt Robinson, an economist at Moody's Economy.com, said in a report last month.
Around 90 percent of the $14 trillion in world merchandise trade is funded by trade finance, such as letters of credit -- traditional banking instruments dating to the Middle Ages.
Because, in contrast to the sophisticated credit derivatives underlying the crisis, they are simple, short-term and backed by a tangible collateral -- the cargo they are funding -- they have proven more resilient than other forms of lending.
But the credit crunch, by drying up liquidity, pushed up prices, and already a month ago trade finance deals were being offered at 300 basis points over interbank refinancing rates, three times or more the going rate a year earlier.
"Our problems to obtain financing didn't start in September. Big banks have been reluctant to hand out credits for shipping for one or two years," Alain Solal, president of CAM Cereales, a large French grain exporter to North African countries.
"We have seen all the traditional banks become more fussy, more greedy. They argued that they could make more money elsewhere. We can see where that led," he told Reuters.
Solal said banks had been asking for ever tougher and unacceptable terms, while customers were seeking longer payments periods because they were having trouble raising finance from their banks.
He did not cite any deals that had fallen through for lack of trade credit, but expressed concern that measures to revive the banking system would not feed through into trade finance.
The World Trade Organisation (WTO) has called a meeting for Nov. 12 to discuss the availability and affordability of trade finance.
Besides the International Monetary Fund and World Bank, it has invited regional development banks, the Berne Union of export credit insurers, and five banks active in trade finance -- Citigroup, Commerzbank, Royal Bank of Scotland, J.P. Morgan Chase and HSBC.
The tension in the market is reflected in the Baltic Exchange's Dry Index, a measure of the cost of moving raw materials by sea, which fell to a nine-year low on Tuesday having plummeted 11-fold from its record high in May.
More than 80 percent of international trade in goods is carried by sea, and the index, which measures the cost of shipping bulk commodities like grain, iron ore and coal, has crashed as the financial crisis and emerging recession has hit demand for vessels.
In these conditions, developing countries are most exposed.
Brazil said last month it would use its foreign reserves to increase credit lines for exporters finding it hard to get trade finance.
Sri Lanka has secured a credit line to pay for crude oil, who supplies 90 percent of its needs.
Thailand, the world's biggest rice exporter, is planning to barter rice for oil from Iran -- a sign that the crisis is forcing countries to return to trading methods that predate even the Middle Ages.
