International Trade Seizing Up due to Banking Crisis

Nakedcapitalism has posted about the potential negative impact of the Banking Crisis on international trade. A well-connected international investor has written to Yves Smith (of Nakedcapitalism) to say that the banking crisis is starting to bring international shipping to a halt. Before going into the problem, Yves explained a bit about the function of a letter of credit:

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).

The main point made by the well-connected international investor is:

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.

If this problem is not tackled swiftly, we could be staring at a global recession very soon. This weekend meetings of G7 finance ministers and central bank governors must take up this issue, among the myriad of financial & banking problems.

For more on this, please go here.