Thursday 23 October 2008
Ships Hit By Credit Crisis As Letters Of Credit Stall – Moody’s
Shippers look likely to be the latest casualties of the global credit crisis as banks grow increasingly wary of providing and honouring guarantees needed for transporting goods, potentially crimping international trade, Moody’s Economy.com Thursday warned in a report.
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Ships Hit By Credit Crisis As Letters Of Credit Stall – Moody’s
23 October 2008
(Dow Jones) – Shippers look likely to be the latest casualties of the global credit crisis as banks grow increasingly wary of providing and honouring guarantees needed for transporting goods, potentially crimping international trade, Moody’s Economy.com Thursday warned in a report.
“With the credit crisis causing banks to shy away from lending to one another for much longer than overnight, there have been reports of banks refusing to honour letters of credit from other banks,” Matt Robinson, an economist at Moody’s Economy.com said in a report Thursday.
A letter of credit is a guarantee that the person receiving goods at the destination port can pay for them. They are used extensively in transactions of significant value between a supplier in one country and a customer in another.
“Banks have also tightened lending conditions considerably by imposing more onerous requirements on importers and exporters before issuing letters of credit,” Robinson said.
Because of this, some cargo ships have been stranded at ports, with stocks piling up because exporters have been unable to arrange shipping without bank finance, he said.
Khalid Hashim, managing director of Thailand’s Precious Shipping PCL, said recently that there is now also anecdotal evidence of letters of credit being cancelled or recalled in Australia, Indonesia and Dubai.
“Letters of credit and the credit lines for trade currently are frozen. Nothing is moving because the trader doesn’t want to take the risk of putting cargo on the boat and finding that nobody can pay,” he said at a recent conference in Singapore.
One official at a South Korean Bank said that given the global financial turmoil, banks are being careful about letters of credit, especially for high value commodities subject to swings in prices.
“As letters of credit for products such as iron ore, coal and wheat are big in terms of value, banks feel less confident in issuing a letter of credit due to the ongoing global credit crunch,” the official, who did not wish to be named, said.
The prospect of stalled letters of credit delaying shipments is a further blow to a shipping industry already reeling from the impact of the global financial turmoil.
Container shippers, bulk operators and port authorities across Asia are reporting slowdowns as the global turmoil crimps demand and the Baltic Dry Index, a signpost of economic trends which tracks the cost of moving goods across the oceans, has plummeted over 85% from its peak in May to a six-year low this week.
In response to falling demand, Singapore’s Neptune Orient Lines Ltd. said Tuesday that its APL unit will scale down key areas of its network, marking the first sharp capacity reduction by a major container shipping company in response to the worldwide economic downturn.
Jeremy Penn, chief executive of the Baltic Exchange, told Dow Jones Newswires: “There seems to have been a genuine slowdown in demand but we don’t know whether that’s a short-term or long-term factor. Credit problems (i.e. getting financing from banks) are (also) pretty widespread and not localized.”
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