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This is where it gets real

by Migeru Mon Oct 13th, 2008 at 04:42:13 AM EST

Reuters: WTO calls meeting on trade finance (October 10, 2008)

Around 90 percent of the $14 trillion in world trade is financed by credit, drawing on simple and traditional banking instruments dating back to the Middle Ages. Because such loans are clearly collateralised -- they are effectively backed by the cargoes they are funding -- they are usually straightforward to organise. As a result, despite the financial crisis, bankers active in this market say they have been doing a roaring trade this year. But now some trade finance bankers say they are running out of capacity to handle deals, and furthermore in recent weeks the price has shot up, squeezing some exporters and importers, especially from developing countries, out of the market.
This has been flagged in Salon threads on Saturday
"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."
and today
Now the one big real fear is that the Baltic is getting squeeze even further is that Traders are increasing finding it tougher to trade commodities and goods because of the increasing reluctance by banks to issue Letters of Credit. Of course, if they decide not to honor existing letters of credit, then all hell breaks loose.
As ARGeezer put it
Grain exporting states that are shown amongst the least affected states could rapidly shift to the worst affected column as their exports pile up at ports in New Orleans, Tacoma and the Great Lakes. No amount of capital injected into banks that may already be fatally poisoned will create a willingness to accept a letter of credit by a foreign counter-party. I believe that new, uncontaminated banks are the only solution.
I wonder whether the window of opportunity for "uncontaminated banks" may be closing, since we have already had entire countries such as Iceland taken down by their banks.

(With a hat tip to Helen)


Display:
Countdown to International Letters of Credit issued by the World Bank and denominated in the IMF's Special Drawing Rights currency?

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 13th, 2008 at 04:45:22 AM EST
Meanwhile all the articles by the Serious People is bascially a set of variations upon the theme of Humpty Dumpty's chances of making a full recovery.

Get over it guys. Banking is infrastructure and you're not coming off the leash for an awful long time.

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Mon Oct 13th, 2008 at 05:30:51 AM EST
As posted in the Salon by Jerome a Paris:
Baltic Dry Index (4.00 / 3)

Baltic Index Collapsing?
I believe many of my readers especially those in the industry are seeing a slide off never before experienced in current times. From a high of 11,000 to the Baltic Dry Index trying to hang on to 2200.

Obviously the bigger picture of economic crisis is the big picture, yet the speed of the decline is extremely disturbing to say the least. The last time the Baltic was at this levels, Oil was not at USD 80 per barrel.

(...)

Now the one big real fear is that the Baltic is getting squeeze even further is that Traders are increasing finding it tougher to trade commodities and goods because of the increasing reluctance by banks to issue Letters of Credit. Of course, if they decide not to honor existing letters of credit, then all hell breaks loose.



by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 13th, 2008 at 05:41:34 AM EST
Traders are increasing finding it tougher to trade commodities and goods because of the increasing reluctance by banks to issue Letters of Credit
Have they tried Paypal?

;-)

--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Mon Oct 13th, 2008 at 05:58:01 AM EST
[ Parent ]
The problem is not making payments per se, it is that twilight zone period when the cargo has been loaded by one party and not yet received by another - one wants to get paid, the other doesn't want to pay yet.

A bank LC, effectively a form of short term credit (secured by the goods and the insurance covering the shipping) is the traditional way to cover that. It's a specialised part of banking, but very straightforward and well understood, with very little risk.

With the banking crisis, it would seem that banks have become reluctant to provide such LCs , which is really worrisome because the whole point of LC is that they do not actually need to be funded: it's a promise by a bank to pay money, not an actual disbursement, so banks should not be too limited in providing those. (unless the problem is that the counterparties no longer accept banks as the guarantor of funds)

This is not good news at all.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 13th, 2008 at 06:07:06 AM EST
[ Parent ]
Letters of credits are pretty much the oldest form of modern banking...

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Mon Oct 13th, 2008 at 06:11:32 AM EST
[ Parent ]
Jerome a Paris:
(unless the problem is that the counterparties no longer accept banks as the guarantor of funds)

The reports I've read rather implied that this is the problem.

I'm in two minds whether to classify this as the psychology of fear or not. After all, banks are failing... but so far they are being nationalised and presumably LoCs are being fulfilled...

by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 13th, 2008 at 06:29:36 AM EST
[ Parent ]
If I am not mistaken, Iceland is not honouring the foreign commitments of its banks...

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 13th, 2008 at 06:34:12 AM EST
[ Parent ]
Good point.
by Metatone (metatone [a|t] gmail (dot) com) on Mon Oct 13th, 2008 at 06:53:23 AM EST
[ Parent ]
A contractor for whom I worked for 17 years would have lost half of its business and 75% of its profits without a functioning letter of credit system.  We had a loading dock with room for two semi-trailers with sea shipment cargo carriers to be loaded simultaneously.  We designed electronic systems, assembled, tested before owners representatives, then packaged and loaded the systems into containers.  At the point those containers were consigned to an agreed upon international carrier we could cash a letter of credit for a majority of the contract value.  We would then send engineers and technicians to meet the containers at the construction site and supervise the on site installation and testing, which, when successfully completed, allowed us to cash a letter of credit for the remainder of the contract value.  At Saudi airport projects we worked along side British, French, German and other European and Asian contractors who used the same system.  Letters of Credit are not just for bulk commodities.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Mon Oct 13th, 2008 at 01:07:59 PM EST
[ Parent ]
could probably be the biggest obstacle.

Actual letter of credit banking is a multi-step process that provides possible failure points of changing conditions over time.  Although the cash is not disbursed until arrival, the bank´s promise to pay is a recorded liability.

  1.  The importer must have an open line of credit/operating loan at the issuing bank before requesting the L/C, short of letting the bank put a hold on his account for the same amount, so the bank has already booked the  loan commitment, but not disbursed actual cash.

  2.  The issuing (importer´s) bank must have a ´correspondent bank´ account in the exporter´s country i.e. ´be trusted for the whole amount´ and must book a liability for the L/C, (charging a percentage/fee for the service).

  3. The exporter wants a valid L/C shortly after the order is received, sometimes before even producing the merchandise and way before shipping out the door.  Production and shipping could take weeks or months during which the exporter may also activate its operating line of credit.  

  4. When the merchandise arrives and the specific conditions (timing, location, form) are met, the importer´s bank must transfer the amount to the exporter´s bank and activate the importer´s line of credit.


Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Wed Oct 29th, 2008 at 10:11:02 AM EST
[ Parent ]
4 AM Calif Time:

News overnight is that Europe is buying some of its banks with US backing; people are not acting crazy; DOW futures on Squawkbox are up over 300.

I'm not a finance guy.  Have they dodged a bullet?  Is it an illusion?  For how long?  What's next?  Mig.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Mon Oct 13th, 2008 at 07:16:25 AM EST
If what Migeru is talking about in this entry continues to occur for a few more weeks (at which point it will be clear to everyone that parts of the real economy are ceasing to function), I think the stock markets will resume their steep declines.

you are the media you consume.

by MillMan (millguy at gmail) on Mon Oct 13th, 2008 at 07:25:44 AM EST
[ Parent ]
More news.  Call-in people on Washington Journal (CSPAN) are VERY intelligent/informed today; nobody sounding fearful, most people angry, nobody optimistic.

Are perishable foodstuffs hanging around on docks, etc going bad?  Is this how a food shortage in the civilized world can start?  Stuff is produced but it sits around and goes bad?  Rats and mice will have a field day.  Oh yeah, increase in disease carriers.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Mon Oct 13th, 2008 at 07:37:07 AM EST
[ Parent ]
Well, it's been two weeks since I wrote about it and it continues to be a problem. But still not very prominent in the media.

India Times: Commodity traders hit by arrest of interbank lending (27 October, 2008)

The credit crisis has begun to take a toll on the real economy, slowly but surely. Among the sectors feeling the pinch, is commodities, though traders are not openly expressing their angst.

A large south-based trader of edible oils has been unable to procure de-gummed soybean oil from a South American exporter, whose bank refused to discount the latter's bill owing to shortage of dollars.

"Our banker, State Bank of India, issued a letter of credit (LC) to the exporter's bank in South America, but the bank refused to negotiate the LC and pay the exporter. We will now have to negotiate with another banker to get the consignment totalling 1.5 million tonne of de-gummed soybean oil," said a company source.




A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 27th, 2008 at 06:52:25 AM EST
[ Parent ]
They are all optimistic today here.Some economists are even saying that worse is behind us...
Why I do not believe them at all...?

Science without religion is lame, religion without science is blind...Albert Einstein
by vbo on Mon Oct 13th, 2008 at 09:14:40 AM EST
[ Parent ]
Big problem even I can see now.

Guys on SquawkBox are all smiles; DOW futures are up 450 ish.

If 1 AM (CA time) comes around and the rally doesn't hold, everybody will be heading for the exit doors.

Today could be definitive; the smiling people WANT this to work.

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Mon Oct 13th, 2008 at 09:36:31 AM EST
[ Parent ]
The smiling people don't get to decide whether banks lend to each other.


A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 13th, 2008 at 10:18:10 AM EST
[ Parent ]
I am with Krugman that this looks promising:
The Belgian finance minister, Didier Reynders, said, "We are committed in all European states to recapitalize banks if we establish a threat to solvency and a risk to the economy."

"The goal is to kick-start the interbank lending market," he said.

Mr. Reynders said the European Central Bank had also committed to helping to unfreeze the commercial paper market, which companies use to finance day-to-day operations.




A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
by Migeru (migeru at eurotrib dot com) on Mon Oct 13th, 2008 at 10:23:47 AM EST
[ Parent ]
Happy days are here again! ;)

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Oct 13th, 2008 at 10:52:55 AM EST
[ Parent ]


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