(Updates with ICAP comments starting in fourth paragraph.)
Dec. 1 (Bloomberg) -- The world shipping industry may face the “most dangerous scenario of all” if European banks limit access to trade finance, hindering commodity traders in obtaining letters of credit, ICAP Plc’s shipbroking arm said.
Further curbs on lending to help banks meet capital-ratio rules would hurt small and medium-sized companies, affecting shipping and physical-commodities markets, ICAP Shipping International Ltd. said in a monthly report e-mailed today.
“We are concerned that a significant reduction of short- term credit to the real economy could be the next major step taken by many banks,” the shipbroker said. “While a short-term lending crisis may not seem imminent, it is not altogether impossible.”
Costs banks charge each other to borrow money have yet to reach the point considered dangerous for lending, Georgi Slavov, ICAP Plc’s head of freight and basic-resources research, said by phone. He cited a level of 100 basis points for the dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, as the danger threshold.
The spread was at 42.29 basis points yesterday, the widest level since June 2009. It opened as far as 365.92 basis points on Oct. 10, 2008. One hundred basis points make one percentage point.
Hire costs for ships that carry dry-bulk commodities plunged 94 percent in less than six months in 2008 from a record high to an all-time low as raw-materials demand withered amid Lehman Brothers Holdings Inc.’s bankruptcy. The Federal Reserve and five other central banks moved yesterday to lower the cost of emergency dollar funding.
“The reaction of the central banks is designed to do exactly this, to reduce the risk of the situation we had back in 2008,” Slavov said by phone.
Short-term finance comprises the bulk of the trade credit market, with banks issuing letters of credit for importers that guarantee payment upon receipt of goods or services, according to the World Trade Organization. ICAP Plc is the biggest broker of transactions between banks.
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