DataPoints:

How the Credit Crunch Sinks Global Trade

Malaysian news agency Bernama.com channels Matt Robinson on the crisis in international trade :

Crisis Of Confidence Hits Global Shipping

KUALA LUMPUR, Oct 23 -- The intensifying credit crisis has spread to foreign trade as reports emerge of banks refusing to honour letters of credit from one another.

A letter of credit is a formal document guaranteeing payment by an issuing bank on behalf of a buyer (an importer), to a third party (the producer of the goods), for a specific amount of money, provided certain conditions are met.

"It is an I.O.U. between an importer and exporter and the lifeblood of international tradeflows," said Matt Robinson, an economist at Moody's Economy.com's Sydney office.

Some cargo ships have been stranded at ports, as stocks pile up, because exporters have been unable to arrange shipping without being afforded bank finance, he said in an article made available by Moody's Economy.com.

"If this problem persists, it will be a double-whammy for Asias export-oriented economies, already reeling from falling consumer demand in key export markets," he added.

"It is most worrisome for Asias export-oriented economies with global shipping being hit as exporters and importers struggle to secure letters of credit," he said.

Banks have also tightened lending conditions considerably by imposing more onerous requirements on importers and exporters before issuing letters of credit.

"With reports of sellers' banks deciding they don't trust the financial institutions named in buyers' letters of credit, it has become an alarming anecdote of cargo ships being stuck in home ports.

"With ships not moving, stocks have been piling up and exporters have grown desperate for income from idle inventory. Importers of raw materials for production are also feeling the pinch as supplies dwindle.

"This could lead to price distortions as demand, despite being subdued by slowing economic conditions, outstrips supply as shipments are delayed," he said.

The impact of the credit crisis has been evident throughout financial markets.

"Interbank lending has ground to a halt, wholesale funding markets have been volatile, equities across the globe have nose-dived and several Asian currencies have capitulated as US dollar funds become scarce," Robinson highlighted.

According to Robinson, the effects of the intensifying financial crisis are increasingly evident beyond financial markets.

"In the real economy, major corporations, particularly in the US, are finding it difficult to roll over short-term commercial paper, causing problems in meeting the payroll," he said.

Declining commodity prices for some of Asias key commodity exporters, including Malaysia and Indonesia, aren't helping trade balances either, Robinson noted.

"Meanwhile, the growth of the Chinese economy has been humbled by the deteriorating external environment," he said.