When trade started falling off in the later half of last year, this blog commented from time to time that the scarcity of trade finance, particularly letters of credit, was playing a meaningful role. That line of thinking was sometimes met with skepticism.
Trade related funding has gotten even more scarce and costly, to the point that governments are now filling the breach. From the New York Times:
As hard as it is for businesses to get loans these days, consider this: even for Toyota Motor, the world’s largest automaker, the well has run dry.
The problem, which led Japan to take the rare step Tuesday of tapping its foreign currency reserves to help, is a result of banks curbing the once-easy stream of credit that had helped nurture a boom in global trade.
When the world’s economies were expanding, banks financed up to 90 percent of the $13.6 billion market for merchandise trade. But lenders pulled back sharply when the credit crisis hit, forcing governments that are already providing trillions of dollars to financial institutions to support another vital part of the system that extends loans to exporters and importers…..
Elsewhere in the world, companies are complaining about similar problems. “We cannot get credit from U.S. banks,” said Byon Hyong Jun, who works for a small trading firm in South Korea that takes orders from American clothing companies and arranges for them to be made in Vietnam and other Asian countries.
In part because of the borrowing difficulties, he added, “garment exporters like us have reduced our shipments to the U.S. by as much as 70 percent.”
Normally, trade finance is considered virtually riskless….
But those dynamics have changed as the global economy contracts. Consider the tale of Jeff Auton, the manager of trade finance at Mark Andy, a maker of specialized printing equipment in Chesterfield, Mo. When he fielded a call from his distributor in Brazil in December, Mr. Auton received the good news first.
“Hey, we’ve got a buyer here,” Mr. 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, Mr. Auton dug into the financials of his customers and managed to persuade the Export-Import Bank of the United States, a government agency, to guarantee a private loan to the Brazilian buyers…
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, mulling 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,” Mr. Auton said….
The world’s export credit agencies, like the Ex-Im Bank, are also finding new ways to finance exports…
Still, said Jeffrey Abramson, vice president for 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.”