London Banker: Systemic Risk, Contagion and Trade Finance - Back to the Bad Old Days

London Banker: Systemic Risk, Contagion and Trade Finance - Back to the Bad Old Days

"The recent 93 percent collapse of the obscure Baltic Dry Index - an index of the cost of chartering bulk cargo vessels for goods like ore, cotton, grain or similar dry tonnage - has caused a bit of a stir among the financial cognoscenti. What is less discussed amidst the alarm is the reason for the collapse of the index - the collapse of trade credit based on the venerable letter of credit....

"The combination of the global interbank lending freeze with the collapse of the speculative, leveraged commodity price bubble have undermined both the confidence of banks in the ability of a far-flung peer bank to pay an obligation when due and confidence in the value of the dry cargo as security for the credit if liquidated on default. The result is that those with goods to export and those with goods to import, no matter how worthy and well capitalised, are left standing quayside without bank finance for trade....

"If cargo trade stops, a whole lot of supply chain disruption starts. If the ore doesn't go to the refinery, there is no plate steel. If the plate steel doesn't get shipped, there is nothing to fabricate into components. If there are no components, there is nothing to assemble in the factory. If the factory closes the assembly line, there are no finished goods. If there are no finished goods, there is nothing to restock the shelves of the shops. If there is nothing in the shops, the consumers don't buy. If the consumers don't buy, there is no Christmas."

(Via Crunchy Con.)