The banker on the other end of the line sounded anxious. It was the morning after the collapse of Lehman Brothers Holdings Inc. in September 2008, and he was calling from Hong Kong with stunning news. “The ships are not moving,” he said. “Not moving.”
That hurried conversation, as the banker gazed at an eerily quiet Hong Kong port, remains for me the best description of the global credit crunch that followed Lehman’s cratering.
Ships weren’t moving because money wasn’t moving: a financial paralysis born out of mutual fear and distrust among banks and companies.
The strains on the complex machine that finances world trade eventually eased thanks to massive injections of funds by central banks, governments and institutions such as the Asian Development Bank.
But the sudden evaporation of the capital that underpins huge trade flows between the exporting economies of Asia and Latin America and the consuming masses of the West left a mark on corporate and banking executives.
With another economic crisis in full flow, the question is whether the current European mess could have the same effect on trade finance as the financial turmoil made in the USA.
The World Trade Organisation, for one, is forecasting that global trade will expand at 3.7 percent this year, well below the 20-year average of 5.4 percent. “More than three years have passed since the trade collapse of 2008-09, but the world economy and trade remain fragile,” Pascal Lamy, WTO’s director general, said when presenting the gloomy forecast in April. “We are not yet out of the woods.”
The more apocalyptic concerns look overdone, given the relatively healthy state of both global trade and the financial groups behind it, but the events of 2008 are a reminder of how quickly that could change.
Perhaps more important, seismic shifts are taking place among both providers and users of trade finance in Asia.
The most striking is that several euro-zone banks embroiled in the crisis, notably French ones, are beating a retreat from financing Asian trade – an erstwhile lucrative stamping ground.
Less than two years ago, lenders in the euro zone (excluding Germany, which has fared better than most countries) were responsible for around 43 percent of large trade loans in Asia, according to Morgan Stanley analysts. In the first quarter of this year, they accounted for about 3 percent.
The most recent data is neither comprehensive nor up-to-date, but conversations with bankers confirm this trend. “The French banks are regrouping,” an executive at a large French lender told me. “This is not just cyclical. It’s a structural change”.
The reasons for the fond adieu bid by Gallic lenders to a once-core business can be summed up in one word: “deleveraging.”
Pinched by financial problems at home and forced to bolster their capital buffers by the crisis and new banking rules, the likes of BNP Paribas SA, BNP.FR +2.06 percent Societe generale SA GLE.FR +2.48 percent and Credit Agricole SA ACA.FR +0.92 percent are retrenching.
To make matters worse, most trade finance is carried out in dollars and French banks’ reserves of greenbacks are low for two reasons: they don’t have US deposits; and their cost of borrowing in dollars has risen since the onset of the euro crisis.
“J.P. Morgan has huge dollar deposits; we have zero. We have to borrow every dollar we lend,” another executive at a French bank said. “We were fat, dumb and happy, leaning on our balance sheet. That era is over”.
Le gap left by the French banks has been filled by two sets of players: international banks with plenty of dollars, such as HSBC Holdings HSBA.LN -0.66 percent PLC and Standard Chartered STAN.LN +0.70 percent PLC, and, more surprisingly, Japan’s big banks, helped by solid balance sheets and the Asian ambitions of Japanese corporations.
“We think a longer-term shift in market share from euro-zone to local and other foreign banks is taking place,” Huw Van Steenis, a Morgan Stanley analyst, wrote in a recent note.
So far, there is little evidence that this reshuffling of the pack is leaving Asian companies with fewer funds at their disposal to feed the world’s appetite for exports.
But there are some worrying signs. A survey of more than 130 emerging-market banks by the Institute of International Finance has reported tightening credit standards in Asia for the past six quarters. Some Asian companies privately complain about the rising costs of trade finance – a possible result of the growing pricing power exerted by fewer banks.
We are nowhere near a post-Lehman crunch. But for economic growth to pick up, ships will have to move a lot faster. As Lisa Minnelli once sang, money makes the world go around.