- Jian-Ye Wang, and Márcio Ronci
- Published Date:
- February 2006
Lending arrangement whereby a multilateral institution makes a loan to a private sector borrower in an emerging-market country, thereby becoming the “lender of record,” that is, the sole contractual lender on the books of the borrower, with this status acknowledged by the government of the borrower’s country. However, instead of maintaining the entire loan on its own books, the multilateral maintains only a portion of the loan—the “A” loan—and participates in the remainder of the loan—the “B” loan— to commercial banks and/or institutional lenders, either directly or through securitization.
Generally refers to all forms of financing where the lender has a claim over specific assets of the borrower, whether with or without a general claim against the borrower. An asset-backed security is characterized as an obligation that is supported by cash flow from a specific pool of assets (typically secured offshore); such securitization can involve the future cash flow of receivables related to exports, services or products. See also structured financing.
The International Union of Credit and Investment Insurers. Established in 1934, this organization now includes almost 50 of the largest export credit agencies and investment insurers from both member and nonmember countries of the Organization for Economic Cooperation and Development. Institutions, not their governments, are members. The Union works for the acceptance of sound principles of export credit and investment insurance and the exchange of information and experience. It also has adopted a series of agreements and understandings by which members undertake to abide by certain maximum credit terms and terms for goods. The secretariat is in London, and members hold two general meetings each year as well as specialist seminars and workshops.
One of the two main categories of risk insured by export credit agencies (the other being political risk). The term applies primarily to the risk of nonpayment by a private buyer or commercial bank or a public buyer due to default (protracted or otherwise), insolvency or bankruptcy, or failure or unwillingness to take delivery of the goods (i.e., repudiation). Usually excluded are cases where there are disputes between exporter and importer about product quality, delivery dates, performance, and the like. Claims will generally not be considered until these disputes are resolved. Also usually excluded are commercial risks on sales from exporters in one country to their subsidiaries in other countries.
See letter of credit.
A quantitative limit on exposure set by most export credit agencies and international banks to monitor and control their total commitments on individual countries. Country limits usually apply to medium- and long-term business and rarely include short-term business. They can have various forms, including annual maturities limits and contract limits.
The insurance provided by an export credit agency. Thus, for example, if some insurance facilities are available from such an agency for country X, that agency is “on cover” for that country. Conversely, where no insurance facilities are available, the agency is said to be “off cover.” An agency’s underwriting policy on a particular buying country is usually referred to as its cover policy for that country. But the term “cover” is also used more loosely to embrace insurance against both political and commercial risks.
The principal product of an export credit agency. However, the term can include both export credit insurance and domestic credit insurance (i.e., insurance on sales within a country). Credit insurance protects the insured party (normally the seller), in exchange for a premium, against a range of risks that result in nonpayment by the buyer. In domestic cover, only commercial risks are involved. In export credit cover, both commercial and political risks are normally involved.
The period from the time of delivery or acceptance of goods (for shortterm business) or from the commissioning of the project (in project financing) until repayment is complete. Maximum credit periods are set for repayment periods. The starting point of credit for short-term business is set by the Berne Union agreements, and that for medium- and long-term business by the Berne Union and the OECD Arrangement.
An account, normally in an offshore bank (that is, a bank outside the country of the debtor or importer), into which all or an agreed proportion of the proceeds of export sales from the output of the project are paid. This account is then used first to service the loans that financed the project. Escrow accounts are an increasingly important part of the security package associated with project financing or a limited recourse financing. Normally, lenders and export credit agencies like to see such accounts hold the equivalent of about one year’s debt-service payments. The existence of such accounts is a comfort to foreign creditors.
In a strict sense, cover issued against the risk of movements in the exchange rate between the currency of the exporter (and thus of the export credit agency) and the currency in which the export contract is denominated. It insures against the risk that, when the overseas buyer pays in the specified currency, the payment will be worth less in the exporter’s currency than was expected when the contract was signed (and less than at the exchange rate for the exchange risk cover agreed upon with the export credit agency). However, the term is more usually—and loosely—used to refer to circumstances governing the exchange rate used by the export credit agency when paying a claim. Should it be the exchange rate on the date the export credit agency came on risk, or on the date the goods were shipped, or on the due payment date, or on the date when the claim is paid? There is no one right answer, but exporters and investors should be sure they understand the position they are taking and, in particular, what date the exportcredit agency will use for the exchange rate, before taking out an export credit or investment insurance facility.
A type of export credit agency that normally not only issues insurance but also lends directly. Some export-import banks also act as borrowers for import finance. There is no single or perfect model, and an eximbank’s organization, status, and functions usually differ from country to country.
The main type of facility offered by an export credit agency. The term describes a range of facilities and can mean different things in different contexts. Strictly speaking, export credit refers to the credit extended by exporters to importers (supplier credit) or the medium- and long-term loans used to finance projects and capital goods exports (buyer credit). It includes credit extended both during the period before goods are shipped or projects completed (the preshipment period or precredit period) and the period after delivery or acceptance of the goods or completion of the project (the postshipment period or credit period).
An institution providing export credit insurance facilities. All export credit agencies were at one stage government-owned or controlled or, if they were private companies, operated on government account. This is no longer the case, because the position is now rather more complicated, and so there is today probably no single meaning for the term “export credit agency.” It is probably best to define it in terms of the functions of the organization rather than its status. There is, in any case, no single model for an export credit agency. Their organization, function, status, and facilities differ between countries. Ideally, the structure and function of an export credit agency should reflect the conditions in and the needs of the country in which it operates. These can change as time passes, even within the same country. Attempts to transfer a model from one country to another without appropriate adaptation nearly always cause more problems than they solve. Most export credit agencies belong to the Berne Union or the Berne Union’s affiliate organization, the Prague Club for newly created organizations.
The main business of export credit agencies. These agencies issue insurance policies of various kinds with respect of a range of risks against payment of a premium. For export credit insurance, the risks embrace both political and commercial causes of loss that may arise in the precredit period (before shipment), or during the credit period (after shipment). Policies may be issued to exporters (supplier credit) or to banks engaged in financing trade (buyer credit). For investment insurance, the risks are restricted to political risks. In both export credit and investment insurance, the insurance is against specified risks or classes of risk and is therefore conditional, although individual policies may be loosely referred to as guarantees.
A document issued by a bank guaranteeing payment on behalf of one of its clients when all the conditions stated in the letter have been met. This is a very important mechanism of world trade, including for export credit agencies both in their short-term business and, less frequently, in their medium-term business. Letters of credit can take a variety of forms, but essentially they are a means of payment between an importer and exporter via their banks. The importer is sometimes called the opener, and the importer’s bank the opening bank (or sometimes the issuing bank). The bank in the exporter’s country is called the advising bank, and the exporter is called the beneficiary. A letter of credit may be revocable, which means that it can be canceled or modified by the importer or the importer’s bank without prior approval from the beneficiary. Thus, a revocable letter of credit offers little security to exporters. The more commonly used irrevocable letter of credit (ILC) cannot be modified without the prior approval of the beneficiary. Unless the letter of credit is conditional, the bank issuing it effectively assumes the risk of default by the importer, provided that the terms and conditions of the letter of credit are fully met. The advising bank, on the other hand, is not required to pay the beneficiary unless and until it receives the funds from the issuing bank. Thus, even ILCs do not provide full protection to exporters. Letters of credit can also be confirmed. This is done either on an open confirmation basis, in which case the issuing bank is aware of the confirmation, or on a silent confirmation basis, in which case the issuing bank and the importer or buyer may not be aware. Confirmed letters of credit reduce certain risks for exporters, such as the risk that the issuing bank may fail or be unable to transfer foreign exchange. But a key point is that when the exporter seeks payment from the advising (or confirming) bank, it must meet all the terms of the letter of credit. Thus, it is vital that exporters carefully read all the conditions and requirements, as these can sometimes be onerous and may contain provisions that significantly reduce their benefit from the transaction. As many as 40 percent of applications from exporters for payments under letters of credit are rejected because of mistakes in documentation and the like. Obviously, this leads to payment delays. But even under a confirmed letter of credit, an exporter may be exposed to risks such as those that arise before the letter of credit is opened. Letters of credit are subject to widely accepted practices and procedures under the International Chamber of Commerce’s Uniform Customs and Practices for Documentary Credits.
Traditionally, insurance or financing applied over a period of more than five years. But there is no generally accepted or precise division between longand medium-term business.
Conventionally, business with a credit period of between one and five years. However, under the OECD Arrangement, medium-term business is that with a credit period of two to five years. There are no universally-accepted or generally-applied divisions between short- and medium-term business, or between medium- and long-term business.
Medium-term export financing is an important dimension of trade credit, both for necessary capital goods and project-related imports into a crisis country and for selected capital goods exports from the country. During recent financial crises, medium-term trade financing to the crisis countries also declined sharply. Wider use of structured financing and improvements on the incentive structure governing export credit agencies would help mitigate the decline and facilitate an early resumption of new credits. The latter is important for economic recovery in a crisis country.
A public sector lender or insurer. Some official creditors, such as the international financial institutions, are multinational. Others are bilateral, such as individual creditor governments and their official agencies such as central banks and export credit agencies when writing business on government account.
An export credit supported (usually insured) by an export credit agency on government account, rather than on its own account. The credit may be a supplier credit or a buyer credit. For medium- and long-term business, the extent of permissible official support is set by the OECD Arrangement (normally limited to 85 percent of the exported value plus, where appropriate, the maximum permissible share of local costs, normally 15 percent of the exported value).
Trade finance business whereby goods are shipped and delivered and payment is made on the basis of invoice, usually in cash. There are thus no bills of exchange or promissory notes, and the exporter relies on the importer to pay in accordance with the invoice or terms of the contract. Open account business is thus most commonly used where seller and buyer have a good and longstanding trading relationship. Export credit agencies are prepared to cover open account business if they are content to underwrite the buyer.
Confirmation of a letter of credit in such a manner that the importer and the importer’s bank (the opening bank or issuing bank) and, where relevant, the authorities and the central bank in the importing country, are aware of the confirmation.
The risk of nonpayment on an export contract or project due to action by an importer’s or buyer’s host government. Such action may include intervention to prevent the transfer of payments, cancellation of a license, or acts of war or civil war. Nonpayment by sovereign buyers themselves is also a political risk. Political risk is one of the two main categories of risks insured by export credit agencies (the other being commercial risk). Some export credit agencies cover political risks in their own countries, especially the cancellation of export licenses. In recent decades the most common political risk claims have been due to inability to convert and transfer foreign exchange, but in these circumstances buyers must first have made local currency deposits.
Insurance of risks arising during the postshipment period. Sometimes called credit cover.
The period from the date on which goods are shipped or accepted until the last payment has been received. Sometimes called the credit period.
Insurance of risks arising during the preshipment period.
Credit extended for the preshipment period.
The time from the date of an insured contract until the date of shipment (or of acceptance by the buyer)—in other words, the period up to the time the credit period begins. Most export credit agencies offer cover for risks arising in this period, but it is sometimes handled through a separate policy or as an addition to the policy, rather than as part of the standard policy or facility.
The practice whereby an insurer passes on to another insurer (called a reinsurer) part of the risk (and a portion of the premium income) of a policy it has written. Export credit agencies can be involved in reinsurance both as reinsurers and as reinsured parties. Export credit agencies receive reinsurance from their governments or purchase it in the private reinsurance market. These are several varieties of reinsurance (e.g., facultative, quota share, excess loss), but the basic principle is the same. Some export credit agencies (e.g., in the United Kingdom) are beginning to provide reinsurance to some private insurers on political risks in some countries.
Transactions involving a maximum credit period of, usually, 180 days, although under some definitions it can extend to 360 days and, in exceptional cases, to two years. For purposes of the OECD Arrangement, the medium term begins (and, by implication, the short term ends) at two years. Short-term business represents the bulk of the business of most export credit agencies and normally includes transactions in raw materials, commodities, and consumer goods. There is no universally-accepted dividing line between short- and medium-term credit.
A term broadly synonymous with political risk but particularly relevant to defaults by or actions of host governments.
Refers to financial instruments that are devised to provide funding on the basis of identifiable assets rather than the credit standing of the borrower concerned. Includes securitization and forms of lending where the cash flow of the borrower is secured to pay off the lender. See also asset-backed financing.
Credit extended by an exporter (supplier) to an overseas buyer as part of the export contract. Cover for this transaction may be extended by the export credit agency to the exporter. Such arrangements are much more common in short-term business. When they arise in the area of medium-term credit, the buyer normally makes a cash down payment (up to 15 percent) and then accepts bills of exchange or issues promissory notes for the balance, at some stage before final delivery or acceptance of the goods.
A catch-all term applied essentially to the entire area of short-term business, especially that involving finance provided directly by banks issuing letters of credit.
Insurance written to cover the risk (called transfer risk) that a buyer may make a deposit of local currency to pay for an international transaction but find itself unable to convert the local currency into foreign exchange for transfer to the exporter. A claim issued under such cover is called a transfer claim. Such inconvertibility can happen even where letters of credit exist. The risk normally arises from restrictions imposed by host governments, through laws or through regulations that have the force of law. During the last 20 years, transfer risk has been the most important political risk covered by export credit agencies. This risk is also covered under investment insurance, where investors are unable to convert and transfer profits and dividends. Export credit agencies often stipulate shortfall undertakings in transfer situations to protect against the possibility that, even if transfer is possible, devaluation may have rendered the local currency deposit insufficient to purchase the foreign exchange necessary to effect the full transfer. Transfer risk is more complicated when a currency collapses, so that even though foreign exchange may still be available to purchase, its price will have risen sharply in local currency terms since the insured contract was signed (or the insured investment made). These events are probably best looked at case by case.
See transfer cover.
The financing required by an exporter to start or continue to operate and produce goods and services to be exported. Normally, export credit agencies are not directly involved in providing working capital. But many exporters offer export credit agency cover (including cover of precredit risk) to their banks as security for finance, including working capital. (They often accomplish this through assignment or hypothecation of the insurance policy to the bank.) A few export credit agencies are directly involved in the provision of working capital, offering either facilities or guarantees directly to banks. However, this is a difficult and high-risk area, especially if the exporter fails to perform its contractual duties and as a result is not paid by the importer. The export credit agency is then faced with the (usually politically-sensitive) job of trying to recover from the exporter the money it has paid to the bank under its working capital facilities.
This paper concerns mostly short-term (mainly less than 180 days) and externally provided financing to support exports and imports of a developing country. Medium- and long-term trade financing, while relevant, is not addressed here.
Estimates based on data collected from private market sources.
Data on trade credit are not readily available, complicating efforts to carry out comprehensive empirical analysis. In cases where data are available, they often are only partial. As a result, many trade finance officials have suggested that a systematic effort involving country authorities, multilateral institutions and the private sector be launched to collect data to facilitate future empirical research.
Exports from emerging markets may have high import content as a result of these countries’ integration into the global supply chains. In these cases, a collapse in import financing may adversely affect exports.
Trade finance was conducted against the background of fairly pervasive exchange controls in the 1970 and 1980s. In order to qualify for exemptions relating to trade financing, this type of credit typically took the form of documentary credits, under which the bona fides of the transaction were monitored through documentation relating to shipping, customs, and financing. This gave a reasonable assurance that any carve-outs from debt restructuring would indeed be limited to trade credits and would not open the door for widespread evasion. With the liberation of capital movements, international banks moved away from providing documentary credits and toward revolving lines of credit extended to banks and even enterprises in emerging markets. These developments have made the distinction between trade credit and other types of short-term financing increasingly difficult.
As specified in Articles 1 and 3 and Annex 1 of the WTO Agreement on Subsidies and Countervailing Measures.
The agreements called for banks to maintain cross-border exposure, including on interbank and trade credit lines, which would still permit banks to shift the composition of their overall exposure. Moral suasion from the central banks in creditor countries was important in some of these cases.
A number of export credit agencies operate what is commonly referred to as a “national interest account” for which certain cases can be underwritten, which are outside the agencies’ normal criteria.
William R. Cline is a Senior Fellow at the Institute for International Economics (IIE).
Marcio Ronci is an economist at the International Monetary Fund. The author wishes to thank Charalambos Tsangarides, Shang-Jin Wei, Yo Kikuchi, Lisandro Abrego, Jian-Ye Wang, Jan Gottschalk and Luis Catao for comments, and Gloria Moreno and Kadima Kalonji for assistance with the data.
This view was shared by various market participants and authorities in a seminar on trade financing organized by the IMF on March 27, 2003 (see IMF, 2003).
There is evidence that foreign bank lending to emerging countries is procyclical (see Jeanneau and Micu, 2002).
Note that the trade financing flow Fj,t is defined as the first difference of the logarithm of the outstanding short-term credit Dj,t : FINj,t = logDj,t − logDj,t, which is approximately equal to the change of Dj,t in percent as logDj,t − logDj,t−1 = log(ΔDj,t/Dj,t+1) ≈ ΔDj,t/Dj,t−1 according to the well known result log(1+x) ≈ x if x< 1.
Some market participants estimate that about half of all trade is financed outside the banking system.
In addition to testing presented in Table 2.3, we also tested for common unit root process among countries (Levin, Lin and Chu, and Breitung t-statistics) and the results were also mixed.
Our selection of explanatory variables was guided by two survey studies: Goldestein and Khan (1985) and Fullerton (1999). For an example of import equation specification, including an external financing variable, see Resende (1997 and 2001).
Herman Mulder is Senior Executive Vice President and Co-Head of Group Risk Management of ABN AMRO Bank NV. Khalid Sheikh is Senior Vice president of the Emerging Market Analysis & Multilateral Organisations Department within Group Risk Management of ABN AMRO Bank.
A financial crisis is defined as an ad hoc massive shock to the financial system, which translates in a very short time span into a dramatic deterioration of the liquidity or solvency position of economic households. Four types of crisis can be distinguished: currency, banking, fiscal and geopolitical.
Trade finance is a very broad term. It is usually short term, uncommitted, self-liquidating, secured, or unsecured. It has multiple forms, and multiple parties are involved with distinct roles. As a consequence, each form has different implications for growth and exposure to capital market risk.
A key example is Hungary. In 1994, the change in privatization policy led to a huge increase of proceeds of about $5 billion, which helped the government avoid a balance of payments crisis and hence default.
Net capital flows to emerging markets rose strongly up to 1996. It should be noted that private capital flows remain focused on a select number of countries. Foreign direct investment flows to the top 10 recipient emerging economies constituted around 80 percent of the total in 2001.
The amount of new investments insured by Berne Union members increased five times over from $3 billion in 1982 to $15 billion in 1996. Total (investment insurance) exposure of Berne Union members grew from $15 billion in 1982 to $43 billion in 1996, whereas total business grew by $39 billion over the same horizon to $422 billion (Stephens, 1999).
In 2002, net private flows to emerging economies were estimated at 2 percent of GDP, half of what they were a decade before. A further drying up of capital flows would impact the credit fundamentals of both nonrated and low-rated governments.
The IMF provided large bailout packages to Mexico ($50 billion) in 1995, Thailand ($17 billion), Indonesia ($34 billion), and Korea ($57 billion) in 1997, Russia ($16 billion) and Brazil ($42 billion) in 1998, Turkey ($10 billion) and Argentina ($20 billion) in 2001, and Brazil ($30 billion) in 2002.
According to a recent investigation by the Institute for International Finance, the current version of the new accord would result in a rise of more than 100 percent of the risk weighting on sovereign credits to emerging markets, relative to what is currently held.
In this context it is also important to note that foreign direct investment flows are mainly going to the medium- to highly-developed emerging markets. Companies do note make foreign direct investments in very high-risk countries. Basically, for many emerging markets trade is the only source for generating hard currency income and achieving sustainable development. Against this backdrop, much more effort should be put into trade liberalization and trade support schemes for exporting companies in emerging markets.
In contrast to many ECA programs that focus on particular sales, trade flows, origin requirements, etc., the IFC facility has comparatively few requirements. More importantly, it allows for bookings to occur on a global basis using the ABN AMRO network. The IFC’s approval parameters have also allowed ABN AMRO to exercise delegated authority in a majority of transaction approvals. While the IFC does review high volume transactions, there are no limits on transaction size, and though there is a general pricing minimum under the program, the IFC permits competitive pricing structures and largely defers to ABN AMRO’s recommendation on market pricing practices.
Preferred creditor status is fundamentally a political expression and a matter of conduct rather than a matter of laws.
New money is defined as any money loaned during a financial crisis to keep the debtor afloat. In our view, new money should enjoy seniority.
The current crisis resolution framework is one where private creditors and obligors in distress have a strong interest in seeing multilateral institutions and local governments provide insurance arrangements. They should ensure that guarantees that are offered are as explicit as possible and are priced appropriately, so as to reflect the risks being insured by them. The use of public guarantees could help to leverage-in albeit small amounts of foreign capital in circumstances where there is a scarcity of funds. The importance of such a vehicle is canvassed in the reality that it will contain the political costs of emergency lending.
In the latter environment (credit risks with a maximum tenor of two years), the primary focus would be to act as an intermediary/broker with the task of seeking private insurance for the emerging-market exporter. If short-term private insurance is not available, the institution could step in. This could be of relevance for countries that do not have good access to the private insurance market (e.g., certain African countries).
Peter Jacobs is Deputy Manager of the Foreign Debt Division, Directorate of International Affairs, Bank Indonesia.
In 1997, the share of raw material imports was 64 percent of total imports, capital goods imports contributed 30 percent, and consumption goods, 6 percent. In 2001, the share of imports of raw material increased to 72.1 percent of total imports.
The premium charged by Bank Indonesia was in accordance with market rates, and as result the premium was high because of the high country risk.
Now the Japan Bank for International Cooperation (JBIC).
Helio Mori is Senior Advisor of the Central Bank of Brazil.
Piper Starr is Vice President, Planning and International Organizations, at the U.S. Export-Import Bank.
Prepared by the staff team of the Policy and Strategy Department for International Operations of the Japan Bank for International Cooperation (JBIC), with contributions from the International Finance Department.
The JBIC supported the establishment of the BEI through a series of technical assistance operations.
Prepared by Yo Kikuchi, an economist with the International Monetary Fund.
FY2003 runs from April 2003 to March 2004.
Xavier A. Jordan is Principal Financial Specialist of the Global Financial Markets Department of the International Finance Corporation.
What are called B loan/preferred creditor status transactions are funding operations arranged by an MDB under which the MDB takes direct credit exposure to an emerging market borrower and participates out a significant portion of that credit exposure to international private sector lenders. Therefore, private sector lenders provide funding to the relevant emerging markets borrower under the “umbrella” of the MDB (i.e., the MDB remains the lender of record). Because the MDB is deemed to have preferred access to foreign exchange resources in the event of a transfer and convertibility event, it is assumed in these operations that international private sector lenders will be able to focus solely on the commercial risk of the transaction’s borrower, rather than sovereign as well as transfer and convertibility risks that they would normally assume in a direct lending operation. For these same reasons, moreover, pricing on such transactions should reflect the lower sovereign as well as transfer and convertibility risks associated with the relevant lending operations, and compensate lenders solely for the commercial risk profile of the underlying borrowers.
Trade finance has traditionally been viewed as one of the less risky forms of credit exposure. But it is always the easiest asset class for banks to cut back in times of heightened risk aversion (since it is a shortterm asset that tends to be self-liquidating, allowing it to be quickly redeemed at par while other types of credit exposure such as bonds and long-term loans would have to be liquidated or hedged by banks at a loss in markets when there is poor sentiment toward the relevant country, and where most likely spreads on financial instruments issued by the country and its borrowers have risen and their financial asset prices have fallen). Given these two fundamental features of trade finance credit exposure, there are two possible reasons for the unprecedented sequence of events in Brazil from late 2002 to early 2003. First, compared with 10 or 15 years ago, there are fewer international banks participating in the trade finance product area, largely a result of consolidation in the international banking sector. Previously, when cutbacks occurred, they were spread over a larger number of banks, and therefore probably happened over a longer period of time. Thus, the “elasticity” of international trade finance flows, i.e., the ratio of absolute amount of increase or decrease in bilateral trade lines to the time over which such increases or decreases occur, has probably increased due to sectoral consolidation. Second, beginning in the 1990s, supposedly “automatic” preferential policies toward trade finance by emerging market-governments gave way to fragmented and inconsistent treatment. And increasingly, where preferential treatment has been given to trade finance debt (i.e., it is excluded from any moratorium/rescheduling as well as transfer and convertibility restrictions that might be imposed on other categories of cross-border debt), such treatment has been in most instances narrowly drawn, for example, with respect to vendor financing only, or with respect to the mode of access to foreign exchange only. Special treatment of banks and other financial companies has also become more sporadic, even where these entities had only refinanced vendor financing. In summary, these two factors probably go a long way in explaining the more rapid contraction in trade finance flows during the recent Brazilian crisis, compared with prior financial crisis episodes experienced by this country.
One underpinning of any sustainable Argentine recovery from its crisis will be satisfactory export sector performance. For the moment at least, since devaluation of the peso in late 2001 and early 2002, this precondition has been met. Argentina ended 2003 with a foreign trade surplus of $15.5 billion, versus $16.7 billion in 2002, representing the country’s third year of such double digit surpluses. The 2003 surplus was based on exports of $29.3 billion, a 14 percent increase over 2002—with 9 percent of that increase attributable to more favorable prices for Argentine exports, and 5 percent due to the increased physical quantity of export volumes. However, the jump in exports was narrowly based, with 90 percent of it having been due to growing international sales of traditional commodities (soy, cereals, meat products, and petroleum products). Moreover, the three principal factors that benefited the country’s export performance last year—high international commodity prices, a record agricultural harvest, and a favorable foreign exchange rate)—are not necessarily permanent phenomena. In this environment, a continued lack of reliable and reasonably priced trade finance represents a potential impediment to the sectoral broadening as well as eventual sustainability of Argentina’s recent favorable export growth performance.
For various reasons, from an operational perspective, Argentine banks are the most likely entities to be able to arrange trade finance receivable securitizations. However, a bank arranging such a securitization transaction does not necessarily have to play the traditional role of a credit intermediary in onlending funds it has borrowed itself or that it holds as deposits. That is because Argentine banks are permitted to invest up to a certain percentage of their peso-denominated equity in foreign currency assets. As a result of this regulatory flexibility—and if the relevant transaction is structured correctly—Argentine banks can undertake all of the following simultaneously, and incur minimal credit risk: (i) purchase foreign currency in the domestic foreign exchange market with pesos; (ii) use the purchased foreign currency to fund and therefore source foreign currency-denominated trade finance assets from exporter clients; (iii) appropriately securitize those assets, and then sell the resultant debt securities to domestic investors for the peso-equivalent of the original foreign currency financing amounts; and (iv) use these peso sale proceeds to replenish their equity.
Like their brethren elsewhere, pension funds in Argentina tend to invest in unison, principally because they are not permitted by the regulatory authorities to purchase more than a certain maximum percentage of any securities offering. Therefore, the sudden withdrawal of one pension fund from a particular transaction—for reasons that might have nothing to do with the credit quality of the relevant investment opportunity—can result in an entire securities offering having to be withdrawn from the market.
These partial credit guarantees would offer second-loss protection for investors from credit events in any particular transaction’s portfolio of trade finance assets. First-loss protection would most likely have to be provided by the financial entity sponsoring the relevant securitization transaction in order to adequately align that entity’s interests with those of investors and second-loss protection providers.
In other words, unsecured credit exposure by MDBs to the relevant emerging-market borrower.
Martin Endelman is a Senior Finance Specialist with the Asian Development Bank.
Glen Hodgson is Chief Economist at the Conference Board of Canada. At the time of this writing, the author was Vice-President and Deputy Chief Economist of Export Development Canada (EDC), Canada’s official export credit institution.
See Glen Hodgson, “Managing International Trade Risk in the Aftermath of September 11th,” August 2002. Available on the Internet: at www.edc.ca/economics.
Former Secretary General of the Berne Union, former head of the Export Credits Guarantee Department (ECGD). and now a consultant on international trade credit as Group Chairman of International Financial Consulting Ltd.
Prepared by the WTO Secretariat. The Secretariat team was headed by Dr. Supachai Panitchpakdi, WTO Director-General, and composed of Marc Auboin, Jesse Kreier, and Moritz Meier-Ewert.
For a more comprehensive discussion, see “Opening Markets in Financial Services and the Role of the GATS,” WTO Secretariat Special Study, September 1997.
For a definition, see Article I.3 (b) GATS and the Annex on Financial Services.
See the Annex on Air Transport Services.
Measures by members include those taken by all levels of government—national, regional and local— and by nongovernmental bodies to which governmental powers have been delegated. See Articles I and XXVIII of the GATS.
See IMF (2003), “Trade Finance in Financial Crises: Assessment of Key Issues,” prepared by the Policy Development and Review Department in consultation with the International Capital Markets and Monetary and Financial Systems Departments, December 9, 2003.
See “Trade Finance,” U.S. Office of the Comptroller’s Handbook, November 1998; and “Bankers’ Acceptances”, U.S. Office of the Comptroller’s Handbook, September 1999.
However, some of them include authorization requirements or even the requirement of a commercial presence (e.g., Moldova and the Philippines). Without additional information, the requirement to have a commercial presence might eventually imply the absence of a pure cross-border commitment.
However, Chile did not make a commitment on the cross-border provision of these services.
See the classification in Box 11.1.
Some WTO members have made commitments under the terms of the Understanding on Commitments in Financial Services, which contains a formula approach to undertaking commitments on financial services. Those members have committed, inter alia, to allow for the cross-border provision of “insurance of risks relating to: (i) … the goods being transported … ; and (ii) goods in international transit.”
See “World’s Best Trade Finance Banks 2001,” annual survey of Global Finance magazine, July 2001.
See IMF (2003), “Trade Finance in Financial Crises: Assessment of Key Issues,” prepared by the Policy Development and Review Department in consultation with the International Capital Markets and Monetary and Financial Systems Departments, December 9, 2003.
Under Article 1 of the SCM Agreement, a subsidy is defined as a financial contribution by a government of public body within the territory of a member that confers a benefit. Export credit, guarantee, and insurance schemes involve “financial contributions,” and central banks, export credit agencies, and other government-owned or controlled entities that provide such schemes likely constitute “governments” or “public bodies.” While the existence of a “benefit” will depend on the terms and conditions of the financial contribution provided, export credit guarantee and insurance schemes likely confer a “benefit” in cases where they place the recipient in a more favorable situation than it would be if it needed to rely on the marketplace. As for export contingency, this will almost always be satisfied in the case of export credits, guarantees, and insurance. Article 3 of the SCM Agreement, however, refers to Annex I of the SCM Agreement, the Illustrative List of Export Subsidies. Relevant for trade finance are sections (j) and (k), first paragraph, pertaining to export credit guarantee and insurance schemes, and to export credit schemes, respectively. In general terms, item (j) provides that export credit guarantee and insurance schemes are prohibited export subsidies where premiums are inadequate to cover long-term operating costs and losses, while item (k), first paragraph, provides that export credits are prohibited export subsidies where, inter alia, they are provided at less than the government’s cost of borrowing. It is not clear whether items (j) and (k), first paragraphs, can be used to establish that a scheme, which does not satisfy the conditions therein, is not prohibited, even in cases where there is a prohibited export subsidy within the meaning of Articles 1 and 3.
This is the case whether or not the WTO member is a participant in the arrangement, so developing-country members that are not participants may also invoke the safe haven.
Exports benefiting from export subsidies could, however, be subject to countervailing measures or to dispute settlement claims alleging adverse effects, where certain conditions are met.