Putting the Squeeze on Growth?

What’s going to get us out of the doldrums?  Growth of course!  What’s going to drive growth? Increased business activity! 

While we are being told this, there are a whole range of factors that are going to put the squeeze on trade. The universal currency for international commodity trading is the dollar. The commodity trading organisations I work with rely on trade finance in dollars provided by the banks to underwrite letters of credit, stock finance, forfeiting and invoice discounting. Their real skill is making efficient use of these credit lines secured against their flow of goods.

However, the major European banks, which provide much of this finance to global trade, are facing a number of pressures:

• An inability to borrow dollars – no-one wants to lend to EU banks at the moment. This was illustrated recently when the ECB stepped in to try and ease the situation and quickly found themselves inundated with interest in their offer of dollar financing, which became 5 times over-subscribed.
  
  
• Increased capital charge on banks relating to trade finance activities as a consequence of the new Basel III rules.
  
  
• Regulatory pressure to deleverage as a consequence of the new capital ratios that are being introduced as part of Basel III. This will inevitably lead to cut backs to trade finance credit lines. I have seen estimates of total deleveraging of USD 1.5 – 2 trillion over the next 18 months.

I have encountered at least one FD of a trading company who is busy signing up as wide a panel of banks as he can to underwrite his business.

All of this is great news if you’re a bank with ready access to dollars looking to get into trade finance as there are likely to be lots of takers.  A big open goal for the US lenders?

So what’s the answer to this trade conundrum?  You could trade in Euros, but who would want them?  How about changing the Basel rules? Only time will tell.