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Wednesday, 4 March 2009
Trade finance shrivels, pushing downturn deeper
Financing for international commerce is drying up fast, contributing to the first fall in global trade in decades and making it even harder to pull the world economy out of its downturn.
Financing for international commerce is drying up fast, contributing to the first fall in global trade in decades and making it even harder to pull the world economy out of its downturn.
As a result, governments, already on the hook for trillions of dollars to financial institutions, are stepping in to support yet another vital part of the market: the part that extends loans to exporters and importers.
Consider the tale of Jeff Auton, the manager of trade finance at Mark Andy, a maker of specialized printing equipment in Chesterfield, Missouri. When he fielded a call from his distributor in Brazil in December, Auton received the good news first.
“Hey, we’ve got a buyer here,” Auton recalled the distributor saying. The bad news, however, was that at least three sales, worth a total of $1 million, were at risk because “the local banks were pricing the deal out of the picture.”
Hoping to rescue the sales, Auton dug into the financial statements of his customers and managed to persuade the U.S. Export-Import Bank, a government agency, to guarantee a private loan to the Brazilian buyers.
“You can sit on the sidelines or you can get involved, especially with the customers you have relationships with,” Auton said. “But it is tough, and it takes a lot of effort.”
Auton, who called the current climate for exports the worst he had ever seen, said he had been lucky to make the Brazilian sales. Many potential customers abroad, he said, simply give up when they cannot get credit locally.
The change in the cost of financing trade deals highlights the problem.
The interest rate on export finance loans to India, to take but one example, has gone from a fraction above Libor, a floating benchmark rate set in London, to about 5.5 percentage points higher.
Sure enough, one potential Mark Andy customer in India, considering a $750,000 order, has not been able to get financing.
“The deals don’t so much fall through, as we haven’t been able to obtain the business in the first place,” Auton said.
Modern finance for international trade has its antecedent in the letter of credit, a Renaissance-era instrument that allowed banks to use their own good relations with bankers elsewhere to guarantee payments among traders. In effect, one bank paid the producer of the goods until delivery, at which point the buyer paid the correspondent bank, which remitted the cash, minus a fee, to the original lender.
Mechanisms are far more sophisticated today. But the basic element echoes through history: Such lending requires trust among banks, and that is precisely what the financial crisis has shaken so deeply.
So, by squeezing export and import financing - the lifeline for 90 percent of international trade - banks are amplifying what would otherwise be a demand-driven downturn.
The best estimates from trade experts suggest that banks are lending at least $25 billion less each month than they were last summer. That amount may sound small next to the approximately $13.6 trillion in merchandise trade annually, but the squeezing at the margins ends up having broader ripple effects.
The International Monetary Fund expects the total volume of global trade to shrink in 2009 by 2.8 percent, the first contraction since 1982.
Japan, long an export powerhouse, registered its fourth month of trade deficits in a row in January, the longest such stretch since a spike in the price of oil threw its trade balance out of whack in the 1970s. Orders for new container ships have dried up, while others are simply idle in big ports like Shanghai and Singapore.
The Baltic Dry Index, a closely watched gauge of shipping activity, plunged after the financial crisis accelerated in the fall, though it has recovered somewhat.
“You would not observe the sorts of phenomena you are seeing if financial markets were in full, vigorous health,” said Christopher Cornell, an analyst with Moody’s Economy.com. “This falls into the category of - I don’t want to say panic - systemic problems.”
Etiquetas Brasil Industria Grafica, which makes packaging for drinks and cosmetics, said it had to jump through hoops to obtain a recent loan. Its lender even peppered other banks with questions about the company’s financial health.
To acquire a $500,000 printing machine from the United States, the Brazilian company eventually agreed to pay an interest rate of 14 percent, or about 50 percent higher than it would have paid before the crisis.
“The bank needed more guarantees, more documentation, and the cost of money is higher,” said Eduardo Millet, the company’s commercial director.
Around the world, companies are complaining about similar problems.
Byon Hyong Jun works for a small trading firm in South Korea that takes orders from American clothing companies and arranges for the garments to be made in Vietnam and other poor Asian countries.
“We cannot get credit from U.S. banks,” he said. Partly as a result, “garment exporters like us have reduced our shipments to the U.S. by as much as 70 percent.”
The shortage of lending is particularly stark because trade finance is normally relatively risk-free. The collateral is the underlying merchandise itself, which is occasionally lost at sea or damaged but cannot vanish into the air like home values or the price of a stock.
“Trade financing is one of the safest lending activities, and it is very simple,” said Jean-François Lambert, global head of trade finance at HSBC in London.
There have already been numerous national and a few international initiatives aimed at reviving the private market.
The World Bank just obtained $1 billion from Japan to finance trade with emerging markets in partnership with banks. Brazil’s central bank has infused its domestic system with $10 billion since October to ease lending. In Asia, Japan is underwriting a regional insurance system for trade finance.
In the run-up to the G-20 meeting of big industrialized and emerging economies in London on April 2, Britain is considering ways to reinvigorate the secondary market for trade finance.
This previously workaday business, dominated by a network of global banks, normally involves buying loans so the original bank could make new ones. Now it has fallen dormant.
The world’s export credit agencies, like Ex-Im in the United States, are also kicking off new ways of financing exports.
The French government recently used a new agency to finance exports of $6.5 billion in planes made by Airbus, the European commercial manufacturer of jetliners. The German government, working through a private insurance company, is putting more resources into exports to Russia.
The world’s export credit agencies, like the Ex-Im Bank, are also finding new ways to finance exports. In a shift, the agency, which traditionally insures only loans made by private banks, is lending money directly to non-American buyers of American products, exercising a legal authority that it has but almost never uses. Last year, it lent about $12 million to sell helicopters to Brazil and $344 million for a rural electrification facility in Ghana. In January, it made two loans for Boeing-made airplanes to customers in Dubai and Morocco.
It typically insures only loans made by private banks. But last year it loaned about $12 million for the sale of l helicopters to Brazil and $344 million for a rural electrification facility in Ghana. In January, it made two loans for Boeing-made airplanes to customers in Dubai and Morocco.
Still, said Jeffrey Abramson, vice president of trade finance and insurance at Ex-Im, taking the place of the banks is a distant second choice.
“Part of our basic mandate is not to compete with the private market,” he said. “We want people to stay in the trade finance game.”
1 comment:
Trade finance shrivels, pushing downturn deeper
By Carter Dougherty
4 March 2009
Financing for international commerce is drying up fast, contributing to the first fall in global trade in decades and making it even harder to pull the world economy out of its downturn.
As a result, governments, already on the hook for trillions of dollars to financial institutions, are stepping in to support yet another vital part of the market: the part that extends loans to exporters and importers.
Consider the tale of Jeff Auton, the manager of trade finance at Mark Andy, a maker of specialized printing equipment in Chesterfield, Missouri. When he fielded a call from his distributor in Brazil in December, Auton received the good news first.
“Hey, we’ve got a buyer here,” Auton recalled the distributor saying. The bad news, however, was that at least three sales, worth a total of $1 million, were at risk because “the local banks were pricing the deal out of the picture.”
Hoping to rescue the sales, Auton dug into the financial statements of his customers and managed to persuade the U.S. Export-Import Bank, a government agency, to guarantee a private loan to the Brazilian buyers.
“You can sit on the sidelines or you can get involved, especially with the customers you have relationships with,” Auton said. “But it is tough, and it takes a lot of effort.”
Auton, who called the current climate for exports the worst he had ever seen, said he had been lucky to make the Brazilian sales. Many potential customers abroad, he said, simply give up when they cannot get credit locally.
The change in the cost of financing trade deals highlights the problem.
The interest rate on export finance loans to India, to take but one example, has gone from a fraction above Libor, a floating benchmark rate set in London, to about 5.5 percentage points higher.
Sure enough, one potential Mark Andy customer in India, considering a $750,000 order, has not been able to get financing.
“The deals don’t so much fall through, as we haven’t been able to obtain the business in the first place,” Auton said.
Modern finance for international trade has its antecedent in the letter of credit, a Renaissance-era instrument that allowed banks to use their own good relations with bankers elsewhere to guarantee payments among traders. In effect, one bank paid the producer of the goods until delivery, at which point the buyer paid the correspondent bank, which remitted the cash, minus a fee, to the original lender.
Mechanisms are far more sophisticated today. But the basic element echoes through history: Such lending requires trust among banks, and that is precisely what the financial crisis has shaken so deeply.
So, by squeezing export and import financing - the lifeline for 90 percent of international trade - banks are amplifying what would otherwise be a demand-driven downturn.
The best estimates from trade experts suggest that banks are lending at least $25 billion less each month than they were last summer. That amount may sound small next to the approximately $13.6 trillion in merchandise trade annually, but the squeezing at the margins ends up having broader ripple effects.
The International Monetary Fund expects the total volume of global trade to shrink in 2009 by 2.8 percent, the first contraction since 1982.
Japan, long an export powerhouse, registered its fourth month of trade deficits in a row in January, the longest such stretch since a spike in the price of oil threw its trade balance out of whack in the 1970s. Orders for new container ships have dried up, while others are simply idle in big ports like Shanghai and Singapore.
The Baltic Dry Index, a closely watched gauge of shipping activity, plunged after the financial crisis accelerated in the fall, though it has recovered somewhat.
“You would not observe the sorts of phenomena you are seeing if financial markets were in full, vigorous health,” said Christopher Cornell, an analyst with Moody’s Economy.com. “This falls into the category of - I don’t want to say panic - systemic problems.”
Etiquetas Brasil Industria Grafica, which makes packaging for drinks and cosmetics, said it had to jump through hoops to obtain a recent loan. Its lender even peppered other banks with questions about the company’s financial health.
To acquire a $500,000 printing machine from the United States, the Brazilian company eventually agreed to pay an interest rate of 14 percent, or about 50 percent higher than it would have paid before the crisis.
“The bank needed more guarantees, more documentation, and the cost of money is higher,” said Eduardo Millet, the company’s commercial director.
Around the world, companies are complaining about similar problems.
Byon Hyong Jun works for a small trading firm in South Korea that takes orders from American clothing companies and arranges for the garments to be made in Vietnam and other poor Asian countries.
“We cannot get credit from U.S. banks,” he said. Partly as a result, “garment exporters like us have reduced our shipments to the U.S. by as much as 70 percent.”
The shortage of lending is particularly stark because trade finance is normally relatively risk-free. The collateral is the underlying merchandise itself, which is occasionally lost at sea or damaged but cannot vanish into the air like home values or the price of a stock.
“Trade financing is one of the safest lending activities, and it is very simple,” said Jean-François Lambert, global head of trade finance at HSBC in London.
There have already been numerous national and a few international initiatives aimed at reviving the private market.
The World Bank just obtained $1 billion from Japan to finance trade with emerging markets in partnership with banks. Brazil’s central bank has infused its domestic system with $10 billion since October to ease lending. In Asia, Japan is underwriting a regional insurance system for trade finance.
In the run-up to the G-20 meeting of big industrialized and emerging economies in London on April 2, Britain is considering ways to reinvigorate the secondary market for trade finance.
This previously workaday business, dominated by a network of global banks, normally involves buying loans so the original bank could make new ones. Now it has fallen dormant.
The world’s export credit agencies, like Ex-Im in the United States, are also kicking off new ways of financing exports.
The French government recently used a new agency to finance exports of $6.5 billion in planes made by Airbus, the European commercial manufacturer of jetliners. The German government, working through a private insurance company, is putting more resources into exports to Russia.
The world’s export credit agencies, like the Ex-Im Bank, are also finding new ways to finance exports. In a shift, the agency, which traditionally insures only loans made by private banks, is lending money directly to non-American buyers of American products, exercising a legal authority that it has but almost never uses. Last year, it lent about $12 million to sell helicopters to Brazil and $344 million for a rural electrification facility in Ghana. In January, it made two loans for Boeing-made airplanes to customers in Dubai and Morocco.
It typically insures only loans made by private banks. But last year it loaned about $12 million for the sale of l helicopters to Brazil and $344 million for a rural electrification facility in Ghana. In January, it made two loans for Boeing-made airplanes to customers in Dubai and Morocco.
Still, said Jeffrey Abramson, vice president of trade finance and insurance at Ex-Im, taking the place of the banks is a distant second choice.
“Part of our basic mandate is not to compete with the private market,” he said. “We want people to stay in the trade finance game.”
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