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."
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)