Letters of Credit Resurgence due to Turbulent Markets
JP Morgan’s Treasury Services business has seen a resurgence in the use of letters of credit (LCs) to facilitate the financing of international trade. “In these uncertain times, LCs are traditional, secure way of doing business and of financing the underlying trade,” said Jeremy Shaw, head of JP Morgan’s Trade Services Business in Europe, Middle East and Africa (EMEA). “The increase in letters of credit usage became noticeable towards the end of 2007 as the surpluses of working capital for open account financing began to dry up. Recently, fewer banks have been willing to extend and guarantee credit so the supply has been declining, and in some cases the cost has risen dramatically. For the right borrower and the right transaction there are still deals to be done, but the market has been tightening up.” Underlying commercial trade has grown significantly over the last 10 years with an associated financing requirement. The recent downturn in global markets is expected to reduce demand for commodities and associated goods and services from recent peaks but the reduction in available credit for trade financing has been much sharper.