NightBlogger

London Banker
Systemic Risk, Contagion and Trade Finance…
Letters of credit have financed trade for over 400 years. They are considered one of the more stable and secure means of finance as the cargo is secures the credit extended to import it. The letter of credit irrevocably advises an exporter and his bank that payment will be made by the importer’s issuing bank if the proper documentation confirming a shipment is presented. This was seen as low risk as the issuing bank could seize and sell the cargo if its client defaulted after payment was made. Like so much else in this topsy turvy financial crisis, however, the verities of the ages have been discarded in favour of new and unpleasant realities.

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. Adding to the difficulties, letters of credit are so short term that they become an easy target for scaling back credit as liquidity tightens around bank operations globally. Longer term “assets” – like mortgage-back securities, CDOs and CDSs – can’t be easily renegotiated, and banks are loathe to default to one another on them because of cross-default provisions. Short term credit like trade finance can be cut with the flick of an executive wrist.

Further adding to the difficulties, many bulk cargoes are financed in dollars. Non-US banks have been progressively starved of dollar credit because US banks hoarded it as the funding crisis intensified. Recent currency swaps between central banks should be seen in this light, noting the allocation of Federal Reserve dollar liquidity to key trading partners Brazil, Mexico, South Korea and Singapore in particular. Fixing this problem shouldn’t be left to the Fed. They aren’t going to make it a priority. Indeed, their determination to accelerate the payment of interest on reserves and then to raise that rate to match the Fed Funds target rate indicates that the Fed are more likely to constrain trade finance liquidity rather than improve it. Furthermore, the Fed may be highly selective in its allocation of dollar liquidity abroad, prejudicing the economic prospects of a large part of the world that is either indifferent or hostile to the continuation of American dollar hegemony.

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. Everyone along the supply chain should worry about their jobs. Many will lose their jobs sooner rather than later.

If cargo trade stops, the wheat doesn’t get exported. If the wheat doesn’t get exported, the mill has nothing to grind into flour. If there is no flour, the bakeries and food processors can’t produce bread and pasta and other foods. If there are no foods shipped from the bakeries and factories, there are no foods in the shops. If there are no foods in the shops, people go hungry. If people go hungry their children go hungry. When children go hungry, people riot and governments fall. More

Source: The Independent
Renewed fears of a global recession sent the world’s stock markets into a state of capitulation yesterday. The UK economy shrunk for the first time since 1992 during the third quarter of this year, declining by 0.5 per cent, far worse than anticipated. In what the Deputy Governor of the Bank of England, Charles Bean, described as “a once in a lifetime crisis, and possibly the largest financial crisis of its kind in human history”, investors fled from shares and virtually every other investment into the few safe havens still remaining, usually US Treasury securities and the Swiss franc.

The FTSE-100 index of leading shares fell by 5 per cent to near the lows seen during last week’s gyrations. Tokyo was down almost 10 per cent, Moscow suspended trading and on Wall Street the Dow Jones industrial average also opened lower.

Dazed dealers could only respond with resignation. The banks were once again marked lower, with concerns that they may be unable to cope with the debt write-offs and losses from a protracted economic slowdown. But anxiety that even the strongest of corporations’ profits will suffer from the downturn, from bad debts and difficulties financing themselves permeated every corner of the investment world.

Confirmation that the UK could indeed be on the brink of a recession deeper and longer than even the most pessimistic had feared came with the publication of the latest official figures on growth. The annual growth rate has sunk from 1.5 per cent to 0.3 per cent, its slowest pace since 1992. The 0.5 per cent shrinkage during the third quarter follows the zero growth recorded in the second quarter and leaves the nation firmly on the road to recession.

The pound continued its slide, moving close to the $1.50 mark, a six-year low – it saw its biggest one-day drop against the dollar in 16 years, falling to $1.52, before rebounding slightly to $1.58 in London trading. Last night sterling stood at an all-time low against the euro – one euro is now worth 82p. Against all currencies it is down about 15 per cent from its peak last year, and is suffering its sharpest declines since sterling was ejected from the European Exchange Rate Mechanism in 1992.

Even so, the beneficial effects on exports have yet to feed through, and the slowdown in the economy is spreading from banks to the wider economy. The GDP numbers showed that manufacturing fared badly once again, as the short-time working announced in so many British car plants in recent weeks had suggested, while the services sector, and in particular retail and distribution, is also suffering. The retail motor trade stood out as a disaster zone. The only areas of growth are in agriculture (just 1 per cent of the economy) and the public sector (around 40 per cent, and set to expand still further as the Government brings forward major infrastructure projects such as the 2012 Olympics and Crossrail).

The numbers were much worse than forecast, and City economists were outbidding each other in their description of the awfulness. Philip Shaw of Investec called them “truly dire”; Matthew Sharratt of Bank of America pronounced them “dismal”; “dreadful” was the verdict of Malcolm Barr of JP Morgan.

However, it is developments in economies far away from Britain which have triggered the latest global bout of nerves. Disappointing results from the industrial giants Sony and Toyota helped spark the sell-off in the Far East. Concerns about economies as diverse as Iceland, South Korea, Thailand, Serbia, Hungary, Ukraine, Belarus and Argentina helped build the panic. The world has increasingly relied on emerging economies, principally China, for much of its growth; but now that the Western economies are so patently weak, hopes are also fading that the emerging nations can continue to pull the world along. Yesterday’s events seemed an appropriate way to mark the 79th anniversary of the Great Crash of 1929.

SEOUL, South Korea - Tens of thousands of people demonstrated in South Korea’s capital Saturday against U.S. beef imports, as a pro-government group staged a counter rally calling for an end to weeks of sometimes-violent protests. It was the second-largest rally in a series of near-daily protests held for the past two months prompted by concerns over the safety of American beef imports. A rally on June 10 drew a crowd estimated by police at about 80,000. More
Also see: 40,000 march against US beef in South Korea

In the largest protest so far, 80,000 demonstrators [photo] waving candles gathered Tuesday evening in central Seoul, according to police, who blocked roads with shipping containers to prevent the crowd from marching to the nearby presidential Blue House. Some 21,000 riot police were deployed to keep order, the Seoul Metropolitan Police Agency said. “President Lee hasn’t listened to the voices of his people. We still don’t have a genuine democracy in our country,” said Jang Dae-hyun, a spokesman for a civic group that has organized protests.

The rally coincided with the anniversary of pro-democracy protests in 1987, which intensified when a student activist died after being struck by a tear gas canister fired by riot police. The protests eventually led the country’s military-backed regime to introduce direct presidential elections. More

SEOUL, South Korea (AP) — South Korea’s prime minister and the entire Cabinet offered their resignations to President Lee Myung-bak following widespread protests over the planned resumption of U.S. beef imports. The government agreed in April to lift almost all restrictions imposed on imports of U.S. beef over fears of mad cow disease.

The decision sparked weeks of protests demanding the government scrap or renegotiate the beef deal amid the perception that it was not doing enough to protect citizens. “President Lee hasn’t listened to the voices of his people. We still don’t have a genuine democracy in our country,” said Jang Dae-hyun, a spokesman for a civic group that has organized protests. More

SEOUL, June 8 (Xinhua)
Thousands of Koreans scuffled with riot police in downtown Seoul until early Sunday morning as they tried to march on the presidential office Cheong Wa Dae to protest the U.S. beef import deal. They were part of the approximately 40,000 protesters who marched in the city center carrying candles and chanting slogans calling for complete renegotiation of the deal for a stricter age limit despite Washington’s pledge not to export beef from older cattle to help ease local fears over mad cow disease. President Lee Myung-bak called U.S. President George W. Bush on Saturday night (Seoul time) to ask for cooperation to ensure that U.S. beef from cattle older than 30 months of age, considered at greater risk of mad cow disease, is not exported to Korea, and Bush promised to do so, according to Lee’s office. More

Recombinomics.com
The Ministry for Food, Agriculture, Forestry and Fisheries will discuss the DNA test results in a meeting of its epidemiological committee Friday. The meeting will focus on the possibility of human infection by the virus, which has been examined by the U.S. Centers for Disease Control and Prevention.

Experts predict the nation will likely suffer bird flu throughout the year if it fails to exterminate what they call the “southern-type virus.” The above comments raise the possibility that the CDC in Atlanta has confirmed H5N1 in the soldier who was H5 positive. Read more

South Korea says it will double its stockpile of the antiviral drug Tamiflu as bird flu spreads among poultry across the country. The office of President Lee Myung-bak said Saturday the government plans to store enough Tamiflu by the end of this year to treat 2.5 million people. Currently, South Korea has enough Tamiflu only for 1.23 million people. The country’s population is 48 million. Read more