L/C cancellations cause distress

We are receiving reports, that because prices of certain goods and commodities have been moving against buyers, some are unilaterally canceling letters of credit.

We understand that the L/Cs emanate from a variety of markets and are affecting overseas suppliers who are not being consulted by their customers in advance of shipping commodities. This is reportedly occurring where documents have already been accepted and seems to be an attempt to gain price concessions. Clearly this is very much against the spirit and the letter of L/C transactions.

Meanwhile as the global recession starts to bite in some previously “de-coupled” markets in Asia, we understand that forfaiting deals are becoming harder to sell.

“Banks which have had a good year and met their budgets by end October are tending to close their books for the year,” comments Charles Brough, head of ITFA’s South Asia region. “Also there is a worry that just one default could wipe out a year’s revenue. At the same time they are retaining their liquidity for their own businesses as interbank markets have dried up.”

This is bound to feel chillingly familiar to market participants in North American and European countries who have had to live with similar circumstances for several months despite the “flight to quality” and margin increases that have benefited trade finance operations to a significant degree.

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