Letters of Credit : Credit crunch affects U.S. exporters

November 17, 2008 by SwizStick  
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Peter Leach in the JOC and highlighted in their sister publication Shipping Digest reports on the latest effects that the global financial crunch is having on international trade – buyers are having a hard time getting letters of credit from banks:

The credit crunch is starting to hit U.S. exporters, especially smaller ones. Already squeezed by their bankers’ reluctance to provide trade finance for shipments overseas, they’re being hurt by the inability of their foreign buyers to open letters of credit with their own banks. The crunch is particularly acute in developing markets such as China and India, where buyers lack access to more sophisticated forms of trade finance.

Chinese banks, whose doors have been open for trade financing in past years, have tightened standards for issuing letters of credit in the last few months. On top of this, there have been a few cases where some banks are refusing to honor existing letters of credit issued by other banks. All of this is having a severe impact on global exporters whose business is already suffering from a slowdown in Chinese demand.

It’s not just a Chinese or developing market problem, either, it’s just especially acute in those regions. According to this article the dry bulk trade is being hit especially hard:

With the acceleration of the credit crunch around the globe, some banks are refusing to honor letters of credit issued by other banks, which could have severe repercussions for international trade if the trend continues. Not only that, but HSBC, a leading trade finance bank, has said that the cost of guaranteeing a letter of credit, a routine instrument used for payment of goods, has doubled.

The credit crunch has already hit the dry bulk trade with China, driving freight rates to record lows and forcing some dry bulk carriers to lay up their ships. Rates are so low that Zodiac Maritime Agencies Ltd., the line managed by Israel’s Ofer family, which also controls Zim Integrated Shipping Services, announced that it may idle 20 of its largest ships.

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