As the economic crisis evolves, international trade suffers. The problem: letters of credit. Buyers can't get them, and sellers are hesitant to accept them unless the bank is an 800 pound gorilla.
Bloomberg tells a story about a business that will see revenues slashed by one third this year because customers have had difficulty getting letters of credit. This results in layoffs and difficulty for the company's employees. Then there are the shippers that the company no longer uses as much... Rinse and repeat.
What is a letter of credit? It's a tool used in global trade to help settle transactions. A buyer gets a bank to guarantee payment to a seller, using big banks as intermediaries. Letters of credit help manage the risks and challenges of overseas trade. To learn more, visit the pages linked below:
Letters of credit are not the cause of the evil. Banks tightening their credit requirements are.
The LC is simply a tool of payment in international trade, many others exist. You might as well prepay, pay net thirty after delivery etc.. None of these work right now due to the financial meltdown.
The tighter lending requirements mean that banks require higher percentages of collateral for home purchases and in international trade. At Letter of Credit Forum you will find several examples how the financial meltdown has affected international trade.