volatile-commodities-give-asias-trade-banks-a-headache

Volatile commodities give Asia's trade banks a headache

Banks are increasingly reluctant to issue new letters of credit as price swings cause orders to be cancelled and prompt some buyers to renege on contracts.

Nina Mehra

October 29, 2008

The sharp swings in commodity prices are proving to be a challenge for AsiaÆs trade finance banks, as they face a trade-off between declining oil prices, which help to lower shipping costs, and surging credit rates.

Several months ago, the cost of freighting cargo was almost higher than the cost of the underlying product being shipped. But banks flush with liquidity were still willing to lend with fine margins and in some cases, little structure.

This is in sharp contrast to the present situation the high-yield bond market is now closed and liquidity is scarce. In the debt capital markets, triple A-rated companies are now paying high premiums to obtain financing. Add to this the...

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