http://www.nakedcapitalism.com/2008/10/international-trade-seizing-up-due-to.html 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.
The Financial Post backs up the story:
http://www.financialpost.com/story.html?id=866522The 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.
The port troubles occur as financial institutions worldwide experience an unprecedented level of failures; even the strongest global banks are taking shelter in government bailouts. Yesterday, the U. K was expected to invest as much as £45-billion ($87.01-billion) in three of the country's biggest banks, while the U. S. government rushed to put in place its US$700-billion rescue package for beleaguered financial market players. Ottawa has so far resisted pleas for direct financial aid for exporters.Everybody should take a trip to the supermarket this weekend to stock up on essential goods.
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