Trade credit tight, but LCs sound

A popular theme in certain financial blogs over the last month, as well as in some international business media and even, somewhat hesitantly, the venerable shipping newspaper Lloyds List, is that banks are refusing to honour letters of credit, or that at least some banks are for some customers.

Trying to pin down evidence for this claim is difficult and there may not be any.

John Collins, chief credit officer of Export Finance and Insurance Corp said: "The rumours are rife, but I've not been able to track down anyone with any direct experience."

John Rumpler, head of trade credit insurance at QBE said the widespread claim was simply false.

On the other hand trade credit is tightening, just as the availability of all credit is tightening.

Australian banks contacted about this debate acknowledge the rumours but say they have seen no evidence during the current crisis that any bank has refused to pay under an LC.  

It is, however, fair to say that banks are being extremely careful to ensure that documents presented comply completely with the terms of the LCs before agreeing to payment.

Given the large fall in commodity prices, it is also plausible that in some countries buyers and their banks may be intentionally looking for document discrepancies in order to force exporters to renegotiate pricing.

This latter theme is attracting more attention.

The World Trade Organisation overnight held a meeting with 30 participants in Geneva to investigate restrictions on trade credit that have paralysed commodities shipments and accelerated a dramatic collapse in bulk carrier charter rates.

The Baltic Exchange will hold a meeting of vessel owners, traders and charterers in London on 19 November. Italian ship owners met in Naples early last week.