by Alex Evans | Oct 13, 2008 | Climate and resource scarcity, Conflict and security, Cooperation and coherence, Global system
Letters of Credit (LOCs) are the crucial lubricant without which the wheels of international trade cannot turn. Here’s how John Mauldin explains them:
If you are a manufacturer of a product and want to sell to someone outside your borders, you typically require a letter of credit from the buyer before you load any cargo at a port. A letter of credit from a prime bank is considered to be proof of your ability to pay. It not only can be a source of ultimate payment, it can be a source of inventory financing while goods are in transit.
And if you are a business which is buying a product, you do not want to release money until you know the product is on the way. There are buyer’s and seller’s agents who make sure these things happen seamlessly, and world commerce had grown because of it.
Just one problem: it looks like LOCs may be no more immune from the credit crunch than any other form of credit. Here, for instance, is Canada’s Financial Post on Wednesday last week:
The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.
“There’s all kinds of stuff stacked up on docks right now that can’t be shipped because people can’t get letters of credit,” said Bill Gary, president of Commodity Information Systems in Oklahoma City. “The problem is not demand, and it’s not supply because we have plenty of supply. It’s finding anyone who can come up with the credit to buy.”
As Alan Beattie reported in the FT on Saturday, Brazil has now offered a blanked guarantee for all trade credit involving its companies, which will commit fully a tenth of its foreign exchange reserves. WTO Director-General Pascal Lamy, meanwhile, has announced that he’ll convene a summit on the issue next month: here’s an excerpt from his speaking points on Friday –
The financial crisis may also be having an impact on developing country access to financing of imports and exports. As you know we have held a number of meetings on this issue at the WTO with both multilateral institutions and private banks, the last one last April, to check availability of trade financing at affordable rates. Up until then, the situation seemed to be stable with volumes and rates at normal levels. But just this week Brazil brought this issue to the forefront.
Given the deterioration of the financial landscape, and despite the welcomed announcement yesterday by the World Bank IFC of an increase in its trade financing programme by $ 500 million, I have today convened major providers of trade finance to a meeting on 12 November to examine this issue and find ways to alleviate the situation if it was to deteriorate.
Bottom line? Naked Capitalism quotes an email from “a well connected international investor not prone to alarm”:
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.
(more…)
by David Steven | Oct 10, 2008 | Climate and resource scarcity, Conflict and security, Cooperation and coherence, Global system, Influence and networks
I’m just back from RUSI, where I spoke about the future of resilience. Full text is below the jump, or you can download the PDF.
The talk complements one from April, at RUSI’s Critical National Infrastructure conference. Alex and I also have a paper on the subject in a future edition of Renewal.
Brief pitch: in turbulent times, we need to build on the work done by emergency planners, and take a broader look at how to make global, national and local systems more resilient to risk. (more…)
by Alex Evans | Oct 10, 2008 | Global system, Influence and networks
Nouriel Roubini summarises how successively larger and larger bailouts seem to be having less and less effect:
– When Bear Stearns’ creditors were bailed out to the tune of $30 bn in March, the rally in equity, money and credit markets lasted eight weeks;
– when in July the U.S. Treasury announced legislation to bail out the mortgage giants Fannie and Freddie, the rally lasted four weeks;
– when the actual $200 billion rescue of these firms was undertaken and their $6 trillion liabilities taken over by the U.S. government, the rally lasted one day, and by the next day the panic had moved to Lehman’s collapse;
– when AIG was bailed out to the tune of $85 billion, the market did not even rally for a day and instead fell 5%.
– Next when the $700 billion U.S. rescue package was passed by the U.S. Senate and House, markets fell another 7% in two days as there was no confidence in this flawed plan and the authorities.
– Next, as authorities in the U.S. and abroad took even more radical policy actions between October 6th and October 9th (payment of interest on reserves, doubling of the liquidity support of banks, extension of credit to the seized corporate sector, guarantees of bank deposits, plans to recapitalize banks, coordinated monetary policy easing, etc.), the stock markets and the credit markets and the money markets fell further and further and at accelerated rates day after day all week, including another 7% fall in U.S. equities today [Thursday].
Looks like today’s all set to be another rough one: the FTSE 100’s down 10% since opening…
by Alex Evans | Oct 6, 2008 | Cooperation and coherence, Global system, Influence and networks
Two excellent columns in the FT last week explored the extent to which the credit crunch is a crisis of trust – and not just in the obvious sense of whether you trust your bank to be able to pay you back your deposit, or whether banks trust each other as counterparties.
As Chrystia Freeland notes, one dimension of the broader crisis of trust is the collapse of faith between electorate and political establishment in the US, seen in vivid colour in the House of Representatives’ initial refusal to approve Paulson’s bailout. For all that “the nearly unanimous verdict of what we might once have called the wise men in both parties, in government and in business, in academia and in the so-called MSM (mainstream media), was that the Paulson plan definitely, absolutely, undoubtedly should be approved”, 228 members of Congress – and countless voters on the phone to their offices – “decided they didn’t believe their country’s political and economic establishment”. She continues,
Americans have good reason to distrust their elite. The country’s political rulers, led by George W. Bush’s strong-arm White House, have made it easy to believe that the US government just doesn’t work. From Katrina to the war in Iraq (at least before the surge), to the budget deficit, to the lack of a national energy policy, Washington doesn’t seem to be delivering very good value to its citizens.
Nor do the nation’s business leaders appear particularly trustworthy at the moment. Even before the credit crunch bit, median wages were stagnating while the incomes of the super-rich soared, creating a gap bigger than at any time since the Gilded Age.
All of this makes the nation’s widely felt, bipartisan impulse to just “kick the bastards out” easy to understand. [But] here’s the rub: the current financial crisis is global, fast-moving and fiendishly complicated. It is precisely the sort of thing it takes selfless, sophisticated technocrats to fix. But, even if America can find the necessary, honourable financial wizards – no mean feat – can it bring itself to trust them?
Luke Johnson, on the other hand, explores the collapse of trust that led to the credit crunch in the first place. Most commentators, he notes, blame Wall Street for the crisis – and yet,
…the heart of this wealth destruction is a collapsing subprime property market. And in that dark and catastrophic place, I suspect that there have been more lies told than by all the world’s bankers put together. It is inconceivable that the many thousands of realtors, mortgage brokers, valuers, developers, builders and other members of the great daisy chain were not in on the game.
Moreover, the homeowners themselves were also willing participants. Many lied to get mortgages and paid more for properties than they could afford, thinking they would flip them for a profit – because property only goes up in value, right?
We may be witnessing the greatest financial fraud of all time – on many levels. Western societies have been guilty of living beyond their means, and the reckoning we face is a sobering jolt. As they say: I have seen the enemy, and it is us.
The breakdown of trust in financial services is fraying the basic systems we rely on to conduct our daily lives. If citizens cannot rely upon multinational banks to safeguard their money then our way of life will grind to a halt. So many participants – executives, regulators – appear to have been negligent and some perhaps worse. In this miasma, who is delusional and who is deliberately misleading? Many of the players are themselves the losers: the staff of Lehman Brothers held $10bn worth of their own shares – now worthless.
The biggest victim in the whole shambles is not the foreclosed householder, the sacked investment banker or the devastated shareholder. It is our self-confidence and belief in the institutions that help fund almost everything.
The current collapse of trust in institutions is not new, and has been well documented for a while now. But we’ve rarely seen the effects of that collapse in quite such sharp relief, or in quite so many dimensions, as during the current financial crisis.
by Alex Evans | Oct 1, 2008 | Climate and resource scarcity, Conflict and security, Global system
Oh, so you thought that the torrent of criticism directed at US Congressmen for voting ‘no’ on the bail-out meant that Senators would be more likely to vote yes tonight, and that this would finally bring some reprieve?
Well, Javier Blas at the FT has news for you: the world’s super-rich don’t share your optimism.
Investors in gold are demanding “unprecedented” amounts of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen. Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.
“There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career,” said Jeremy Charles, chairman of the LBMA. “The gold refineries cannot produce enough bars.” The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds. Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street’s woes. “It is a flight into gold because it is a physical asset,” he said.
Well, that’s a vote of confidence, eh readers? They’ve probably been perusing Nouriel Roubini, who reckons (bailout prospects notwithstanding) that “we are now back to the risk of a total systemic financial meltdown”:
The next step of this panic could become the mother of all bank runs, i.e. a run on the trillion dollar plus of the cross border short-term interbank liabilities of the US banking and financial system as foreign banks as starting to worry about the safety of their liquid exposures to US financial institutions; such a silent cross border bank run has already started as foreign banks are worried about the solvency of US banks and are starting to reduce their exposure. And if this run accelerates – as it may now – a total meltdown of the US financial system could occur.
We are thus now in a generalized panic mode and back to the risk of a systemic meltdown of the entire financial system. And US and foreign policy authorities seem to be clueless about what needs to be done next. Maybe they should today start with a coordinated 100 bps reduction in policy rates in all the major economies in the world to show that they are starting to seriously recognize and address this rapidly worsening financial crisis.
Doom, gloom. Still, readers may also like to be aware that in noting the ongoing travails of Morgan Stanley and Goldman Sachs, Nouriel suggests that “the only institution sound enough to swallow Goldman may be HSBC”. Another reason – as though one were needed! – why those of us who bank with HSBC’s lovely First Direct can shake our heads in bewilderment at those of you who choose not to.
Now, if they only offered safe deposit boxes…
