Several reports over recent days indicate a severe shortage of letters of credit (L/Cs), not only for exporters, but also for shippers who rely on L/Cs to ensure that they are paid for the cargoes they ship.

One recent report suggests that severe falls in the Baltic Dry Index (BDI) - the benchmark index routinely used to price commodity shipping costs on various routes - points to a severe downturn in shipping which some observers believe is due to a shortage of L/Cs.

Six-year low

In late October the BDI fell to below 1,000 for the first time in six years as the credit crunch continues to curb global trade.

The benchmark index, watched by banks including UBS AG as an economic indicator, has this year dropped by a massive 89 per cent this year to 982 points.

The dire state of the shipping sector has also driven down the combined market capitalisation Bloomberg's Dry Ships Index to US$5.5 billion from US$32 billion a year ago.

Different views

Some analysts suggest that the fall in international trade traffic is overstated by the dramatic fall if the BDI.

Others are blaming the shortage of L/Cs due to banks' unwillingness to extend credit to traders and to shippers wanting assurance that they will be paid for cargoes sent.

Reputable US banks

One L/C professional suggested that a major squeeze on L/Cs has been caused by non-US banks' insistence on dealing with only a few "reputable" US banks.

But he points out that he is not sure whether reputable in this context means banks which are too big to fail and whose shares have or will be bought by the US treasury.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.