Finance throws sand in wheels of global trade:James Saft

By James Saft

LONDON (Reuters) - Trade finance, a basic lubricant for the global economy, is becoming much more expensive and tougher to get, accelerating an already harrowing downturn.

Banks are reluctant to allocate scarce capital to trade finance, which funds cross-border buying and selling, and are very wary about being caught short by defaults by other banks which write letters of credit or by the importers and exporters themselves.

While not the prime cause of a slowdown in global trade, which is being buffeted by declining consumption and tighter finance to households and businesses, tough conditions for the obscure but crucial corner of finance that funds goods and commodities between dispatch and delivery is sand in the wheels.

Stunningly bad trade figures from China underlined the problem. China had been expected to show double digit growth in trade last month as compared to November 2007, but the data showed exports falling 2.2 percent from a year ago and imports down 17.9 percent.

"Global demand for Chinese products is vanishing," said Gene Ma, an economist at China Economic Monitor, a Beijing consultancy. "Secondly, the credit freeze in importing countries has made it hard for Chinese exporters to sell abroad. I heard some Chinese exporters had to cancel shipments as they were worried about getting paid by their buyers."

Chinese banks have been very nervous about accepting letters of credit from abroad, making it tougher for imports to China to get the needed financing. China and the U.S. pledged $20 billion to fund trade with developing countries last week, but that is a tiny balm for a huge market.

The rule of thumb is that 90 percent of global trade requires financing. Karl Alomar, chief executive of China Export Finance, estimates that letters of credit which had accounted for about 70 percent of Chinese trade finance in 2007 might now only have 30-40 percent of the market, in part due to concerns about international banks.

Many deals that would otherwise go through will inevitably be scrapped, while many more will be less profitable. The World Trade Organization Director-General Pascal Lamy said in November that some transactions that charged a "spread" of 80 basis points over bank benchmark rates a few months ago were now charging 500 basis points.