Problems with “Letters of Credit” and international trade
International trade depends on “Letters of Credit”, or LCs. They finance shipments, but also assure the shipper he gets paid for the cargo sent. While LCs are very important for traders, they are not the favorite financial tool of the banks. Trade finance generate low profits usually, but it’s operationally intensive. Lately it has been harder to get LCs, accelerating the decline in international trade.
Here just a few examples from Bloomberg to illustrate the problems:
“Richard Burnett’s lumber company had started loading wood onto ships heading for China. More was en route to the docks. It was all part of an order that would fill 100 40-foot cargo containers. Then Burnett got a call from his buyer at Shanghai VIVA Wood Products Co. The deal was dead. He told Burnett, president of Cross Creek Sales LLC in Augusta, Georgia, he couldn’t get a letter of credit to guarantee payment for at least six months.”
“Suppliers of oil, coal, grains and consumer products from Chicago to Mumbai are losing sales as the credit crisis spreads beyond financial institutions, and banks refuse financing or increase the fees for buyers. Coupled with declining demand, the credit squeeze is threatening international trade, one of the lone bright spots in the global economy.”
“An Iranian oil tanker able to carry enough crude oil to supply Ireland for five days arrived at the Turkish port of Ceyhan on Oct. 6. Then she waited eight days before the company that hired her was able to secure a letter of credit that was acceptable to Iraq, the country selling the cargo, according to two people involved in the loading and unloading of the oil.”
“Mumbai-based Essar Shipping Ports & Logistics Ltd. couldn’t buy equipment used to handle bulk materials at ports when the Chinese supplier wasn’t able get a letter of credit from an Indian state-owned bank accepted in China, said V. Ashok, Essar’s executive director.”
According to the World Trade Organization (WTO) about 90% of the $13.6 trillion of goods trade worldwide use LCs. If this downward trend continues, it will have a destructive impact on the global economy at the worst possible time.
This will mean more and more pre-payments…..
And via those pre-payments the banks do get more money…. and with that money – they are able to put out LCs again…
I wish it would be this simple….
But if companies do want to keep doing business; we have to get back to “trusting the blue eyes”; as our companies old bookkeeper would cal it….
I believe the trend has been for quite some time to prefer other methods of payment to LCs, since LCs are complicated. In LCs you need to carefully create documents (bill of lading, commercial invoice, insurance certificate) all of which is time consuming and error prone.
Nevertheless, in a time of little trust, the LC at least addresses the relationship between buyer and seller, shipper and consignee. In prepayment the buyer finances the whole operation, with tight credit markets, buyers might not be in a position to prepay. When applying for an LC the buyer at least can provide collateral in the form of a bill of lading representing the goods.
[...] Source ; Sjeltur.nl [...]
Here are your good writing
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THX!
Sjeltur Gooooo!!!!!!!
@Fredy – well; you do pick all the articles of my friend Rudy…. – So = GOOOOOO RUDY – GOOOOOO !!!
@lcguy – I am agreeing with you. In the past I had to make a lot of L/C’s ready. And even had to check them. TIME CONSUMING….
But a good alternative is not really there uh…??
But yeah – if a bank just do not want them out anymore (no matter if they are made correct or not). What can we do then…??
Thank you.
I’m doing my best to write stuff here that’s hopefully interesting. It’s good to hear there are people out there that do appreciate my writing. 