Two of London's leading newspapers are blaming a letter of credit (L/C) shortage for severe downturns in shipping and international trade.

Articles in The Times and The Independent both point out that L/Cs - that until very recently have been a vital cog in the machinery of both international trade and shipping - are simply not around to support these activities.

Savage increases

Even where L/Cs are available, The Times says that "savage increases" in the cost of funding for exporters is undermining international trade in goods and raw materials.

At the same time, the newspaper says buyers of goods are being denied access to L/Cs.

HSBC meanwhile says the cost of guaranteeing a L/C has doubled over recent weeks.

Lehman's role

The Independent notes that since Lehman Brothers collapsed in September, the cost of shipping has plummeted by nearly 80 per cent and blames the shortage in L/Cs for the fall.

The paper then goes on to blame the L/C shortage not only on the overall credit shortage but also on the Lehman Brothers collapse itself.

The Lehman Brothers collapse had a significant impact on confidence in L/Cs the paper says because a substantial quantity of L/C business was frozen in the system when Lehman's went down, thus causing the market to suffer near collapse.

Gloomy outlook

The impact of the L/C shortage could be substantial.

Fewer L/Cs means less international trade which equates to less economic activity, thus raising the prospects across the world of even deeper recessions than expected.

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