Nakedcapitalism 11 Ottobre 2008

I have been more than a tad concerned about near-paralysis in the money markets and imploding equity prices. But this e-mail, from a well connected international investor not prone to alarm or (normally) the use of capital letters says that the banking crisis is staring to bring international shipping to a halt.

By way of background, letters of credit of various sorts are essential for trade. For instance, imagine the difficulty if you are, say, a Chinese manufacturer who wants to sell his wares to buyers overseas. How can he be sure the goods he ships will ever be paid for? Imagine the considerable difficulty and cost of chasing a deadbeat in a foreign country. Letters of credit. issued by banks, assure payment. They can also serve to finance the shipment (ie, fund the inventory while it is in transit).

Not only are banks now leery of lending to each other for much longer than overnight, they are also starting to refuse to honor letters of credit from other banks. From the above-mentioned reader:

At the end of the day, if every counterparty is bad then you don't have a market and you don't have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won't give it to him. That means he can't ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up. THE CENTRAL BANKS CAN'T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM.

We spoke later in the evening and said he had heard of another instance of a trade transaction failing, different parties entirely, this a shipment of coal, again due to the unwillingness of the seller's bank to accept an LC from the buyer.

Confirmation comes from the Financial Post, "Grain piles up in ports" (hat tip reader Vox Sanus):

The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.

"There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

So far the problem is mostly being felt in U. S. and South American ports, but observers say it is only a matter of time before it hits Canada.

"We've got a nightmare in front of us and a lot of people are concerned it's going to get a lot worse," said Anthony Temple, a grain marketing expert based in Vancouver....

Access to credit is key to the survival of maritime trade and insiders now say the supply is being severely restricted. More than 90% of the world's trade by volume goes by ship...

"The credit crisis has made banks nervous and the last thing on their minds is making fresh loans," Omar Nokta, an analyst at investment bank Dahlman Rose, said in an interview with Reuters.

While shipping has always been a cyclical industry whose fortunes rise and fall with the global economy, analysts said the current crisis over the drying up of credit is something they have never seen before.

Jason Myers, head of the Canadian Manufacturers and Exporters, said exporters across Canada are getting caught up in the turmoil as customers delay payments, forcing them to shoulder the cost.

"What some companies are saying is we can't pay you until our customer pays us, so it becomes a question of who bears the financial risk and the cost," Mr. Myers said. "We're hearing about it more and more."

What that means is that manufacturers are getting hit as revenue slows and longtime customers disappear from the order book altogether. As profits decline, investment in product development starts to fall, too, he said.

The Canadian Wheat Board, one of the world's biggest grain marketers, has yet to refuse a customer because of poor credit, according to a spokeswoman. "As of this moment we haven't run into that problem," said Maureen Fitzhenry

Source >  nakedcapitalism.com | oct 10