European Banks May Soon Have To Write Down $100 Billion Worth Of Bad Shipping Loans

chinasmack ship

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Yesterday, we discussed how the Baltic Dry Index (BDIY), a benchmark for shipping rates, isn’t a perfect proxy for the macroeconomy.  Sure, shipping rates fluctuate with global trade activity.  But the correlation between rates and the economy is distorted by supply and demand dynamics within the shipping industry itself.We mentioned that tight shipping capacity during the credit-fuelled boom times caused shippers to order ships like mad.  However, ships can’t exactly be assembled and delivered as quickly as a book shelf.

This phenomenon is referred to as “long lead times.”  And in today’s New York Times, Keith Bradsher digs deeper into the matter on the front page of the business section.

Simply put, a long lead time means it takes a long time to make something.

According to Bradsher’s report, ships that were ordered during the years going into 2008 are just now “being delivered by the hundreds.”

And the negative consequences aren’t limited to just idle ships and low revenue.

Basil Karatzas, the chief executive of Karatzas Marine Advisors, a ship brokerage and finance advisory firm in Manhattan, estimated that European banks hold about $500 billion in shipping loans on their books and face nearly $100 billion in losses to restructure them.

A sharp rebound in the economy may be able to alleviate the situation.  But at this point, that seems unlikely.

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