L/C’s: Not short for Luggage of Cash
By Matthew Cooke
Posted 15/05/2009
A big ticket China buyer recently asked me;
“Hey, what’s happening over there? No one wants me to pay by L/C; I thought they loved L/Cs - this is becoming a serious cash flow issue.”
I pointed him to a quote from The Times: ‘The credit drought is undermining international trade in goods and raw materials with savage increases in the cost of funding for exporters. At the same time, buyers of goods are being denied access to letters of credit - the banking instruments that are the nuts and bolts of global trade.’
Then proffered a couple of reasons why they aren’t so keen any more:
One, they don’t want anything drawn on a UK issuing bank; the cost of guarantees has doubled. Guess what? The Chinese manufacturers (and their banks) don’t think the UK financial institutions have the capital to pay - I wonder what ever gave them that idea!
And secondly, the Chinese banks themselves don’t have the funds or inclination to pay down if the payee should decide to discount it for cash today.
“So what am I supposed to do? Pay them Cash?”...He then fainted!
The Federal Reserve recently released the Loan Officer Opinion Survey on Bank Lending Practices by US and International lending institutions for the month April. Apart from the fact that the reporting journo spelt survey, ‘seurvey’, it was generally awful with nothing else worth smiling about.
Judge for yourself:
“More than 80 percent of domestic banks that reported having tightened standards or terms cited a less favourable or more uncertain economic outlook abroad, increased concern about foreign country risk, worsening industry-specific problems, reduced tolerance for risk, and a less favourable or more uncertain economic outlook in the United States as reasons for the tightening. All of the eight foreign banks that reported tightening their standards and terms on international trade finance cited a less favourable or more uncertain economic outlook in the United States and abroad and an increase in concern about foreign country risk as important reasons for the tightening.”
I warned you it makes for dismal reading , and what makes it sting all the more is the increased use of the vacant phrases de jour like ‘Green shoots of Recovery’.
If I hear another politician utter the words ‘green shoots of recovery’, I may well head towards Parliament square, take my position on the nearest grassy knoll and flower bomb the offending legislator (with the notable exception of “Two Jags (or two Bogs depending on your tabloid)” Prescott…he can be a bit tasty when confronted by the disgruntled proletariat as I seem to remember!).
Anyway, I jest. Of course I could never advocate soiling a length of Saville Row’s finest Worsted (even if we did pick up the tailoring tab on expenses!) for a polit-bureau type merely passing an opinion intended to inspire hope.
It’s just the hollowness and repetition of the reference that irks me. Somewhat like those pesky & mysterious WMD’s of George ‘Dubya’ Jr. If the people at the podium keep saying it enough, they may surely appear as if by magic and even if they don’t, the general public will believe they are there, just hidden from sight. Please save me from the diabolical Win-Win of repetitive propaganda.
"An irrevocable letter of credit is one of the strongest assurances of payment in international and domestic transactions" states an Executive Vice President of Corporate Development for a US multinational. "It represents an irrevocable payment obligation of the issuing bank contingent upon conformance to the terms of the documentary credit. Further, the letter of credit cannot be cancelled or amended without the agreement of both payee and the issuing bank.”
Yes Ma’am that may well be the case. But if you are buying from China right now then good luck feeding that line to your supplier. Oh, and don’t forget to take a suitcase full of cash as that’s about all they are interested in at the moment as payment.
PS. For an alternative to L/Cs or cash laden valises, call CEF London (link to contact us) sales on +44 207 259 3880.
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