Since the outbreak of the financial crisis, highly indebted countries and certain economic sectors have been subjected to a painful cleanup process. This is the after-effect of a cocktail consisting of overly optimistic expectations mixed with unsustainable borrowing. These factors also strike a chord with the difficulties experienced in international merchant shipping, which hit Hamburg doubly hard as the “gateway to the world”. For one, Hamburg is home to over 120 shipping companies. What is more, the financial services linked to shipping play a prominent role in the city’s financial centre. The reasons for the deep-rooted crisis in shipping are essentially twofold.
First, the expectations of sustainable growth in trading volumes and transport revenues came to an abrupt end. Following the global economic downturn in autumn 2008, freight rates plummeted to unforeseen depths. To this day, this declining trend has not yet been reversed. The New ConTex Index, which is calculated in Hamburg and measures charter rates for container ships, currently stands at only a little more than a third of the value of October 2007, back when the index was introduced.
Second, the virtually unchecked rise in capacity further complicates the situation because against the backdrop of cheaply available finance and optimistic expectations the order books of shipyards across the world have become full. Further pressure comes from the fact that, on the grounds of cost, increasingly larger ships are being ordered while smaller ships are gradually being scrapped.
As a result, the financing of shipping in Germany sailed into troubled waters. In many cases, equity capital providers were closed-end funds. The banks had contributed the necessary high share of debt capital on favourable terms. In the meantime, many shipping funds are making losses or even have filed for insolvency. The portfolios of the German banks that were involved in the financing of shipping deteriorated significantly. Some of them belonged or belong to the world’s leading equity capital providers in this sector. Meanwhile, new business is being scaled back, and some of the previously major credit providers have withdrawn from this market sector. As is the case in the banking industry, shipping companies, together with the entire industry, now face the challenge of reviewing their business model in a difficult market environment in order to raise the necessary equity and debt capital for the future. In this context, it seems important to consider the compatibility of risk and returns, and ensure sufficient transparency in this regard for capital providers and other involved parties. This could also pave the way for new sources of finance beyond conventional bank lending.
The financing of shipping undoubtedly represents a substantial regional and sectoral risk in the banking industry. In mid-2012, loans issued by the major credit providers amounted to just over €100 billion. Banking supervisors have been closely analysing the affected institutions for some time. At the same time, the Bundesbank has been assessing and evaluating the crisis from a broader perspective with a keen eye on the stability of the entire financial system. Up until now, robust economic activity has helped the German banking system to cope with the pressures from problem business areas such as the financing of shipping. It would be wrong to yield now to the temptation presented by the current low-interest rate environment to postpone cleaning up the balance sheets.
Source from maritime connector