One of the more worrying signs of global recession to have manifested itself over the past few months is the veritable collapse in the price of chartering a ship. Since Lehman Brothers was allowed to go under in September, the Baltic Dry Index, which tracks the cost of shipping dry cargo, has fallen by nearly 80 per cent, having already halved in the month before that. Shipping brokers say that it is now possible to charter a ship for less than its operating costs.
Even more worrying than the drop itself are its underlying causes, which go way beyond the direct impact of the economic downturn on world trade. Cargo for shipping tends to be financed through letters, or bills, of credit. This is a relatively simple device that ensures that the provider of the cargo gets paid on delivery.
When he releases the cargo for shipping, the provider gets issued with a letter of credit, which he can either sell immediately for a discount, or cash in when the buyer takes delivery. This market, along with many others, became gummed up when Lehman Brothers went bust. In part, this is just another manifestation of the wider loss of confidence among banks in credit instruments of all types. However, substantial quantities of letters of credit business were frozen in the system when Lehman's went down, causing the market to suffer near collapse.
This in turn threatens further to undermine global trade. Without the guarantee of payment provided by letters of credit, many shippers will not take the risk. Less trade equals less economic activity equals an even deeper recession than we were facing already. Like banking, shipping is part of the plumbing that keeps the world economy operating. It may need similar government intervention.Reuse content