- Christopher Jarvis, Balázs Horváth, and Michael Kuhn
- Published Date:
- December 1995
Agreed Minute—the terms agreed upon in a Paris Club rescheduling meeting are embodied in an Agreed Minute. The Minute normally specifies the coverage of debt-service payments to be consolidated, the cut off date, the consolidation period, the proportion of payments to be rescheduled, the provisions regarding the down payment, and the repayment schedule for both the rescheduled and deferred debt. The Agreed Minute forms the basis for bilateral discussions between individual creditor governments (including export credit agencies) and debtor countries on the bilateral agreements that implement the rescheduling.
Arrears—generally, debt-service payments not made on the due date. In the specific context of export credits, arrears are overdue payments by borrowers that have not yet resulted in claims on export credit agencies.
Berne Union (International Union of Credit and Investment Insurers)—an association founded in 1934 of export credit insurance agencies, all participating as insurers and not as representatives of their governments. The main purposes of the Union are to work for sound principles of export credit insurance and maintenance of discipline in the terms of credit in international trade. To this end, members exchange information and furnish the Union with relevant information, consult with each other on a continuing basis, and cooperate closely.
Bilateral agreements—agreements reached bilaterally between a debtor country and each of the creditor countries participating in a Paris Club rescheduling. The agreements establish the legal basis of the debt rescheduling as set forth in the Agreed Minute. Bilateral agreements specify the interest rate on amounts deferred or rescheduled (moratorium interest), which is agreed bilaterally between the debtor and each creditor.
Bilateral deadline—the date by which all of the bilateral agreements must be concluded. The period for concluding bilateral agreements is usually around six months from the date of the Agreed Minute.
Buyers’ credit—a financial arrangement in which a bank or financial institution or an export credit agency in the exporting country extends a loan directly to a foreign buyer or to a bank in the importing country to finance the purchase of goods and services from the exporting country.
Claims payments—payments made, after the claims-waiting period, by an export credit agency on insured or guaranteed loans, when the original borrower or borrowing-country guarantor fails to pay. This is recorded by the agencies as an unrecovered claim.
Claims-waiting period—the period that exporters or banks must wait after arrears occur before the agency will pay on the corresponding claim.
Cofinancing—loans or grants to developing countries made by commercial banks, export credit agencies, or other official institutions in association with other agencies or banks, or the World Bank or other multilateral financial institutions in support of programs or projects.
Commercial risk—the risk of nonpayment by a nonsovereign or private-sector buyer or borrower in his home currency arising from default, insolvency, and/or failure to take up goods that have been shipped according to the supply contract (contrasted with transfer risk arising from an inability to convert local currency into the currency in which the debt is denominated, or broader political risk).
Commitment—a firm obligation by an export credit agency to lend, guarantee, or insure resources of a specified amount under specified financial terms and conditions and for specified purposes for the benefit of a specific importer, expressed in an agreement or equivalent contract.
Commitments—an accounting term corresponding to the total amount of loans by, or guaranteed or insured by, an export credit agency, either globally or to entities in a specific country, excluding amounts that are in arrears or on which claims have been paid. Usually includes principal and contractual interest payable by the importing country on disbursed and undisbursed credits, and sometimes includes not only liabilities of the agency but also uninsured parts of the loan. Therefore, “commitments” are almost always larger than the face value of the loan, and sometimes larger than the agency’s total exposure.
Concessionality level—measures the degree of concessionality of credits offered at below-market interest rates, or partially in grant form. Participants in the OECD Consensus have agreed to methods for calculating concessionality. See also grant element, below, and for further details see Appendix III.
Consensus—formally the “Arrangement on Guidelines for Officially Supported Export Credits,” a framework of rules governing export credits agreed by members of the OECD’s export credit group. For further details see Appendix III.
Cosmetic interest rates—interest rates specified in contracts below market rates but without effectively conferring a grant element. These rates are sought by some borrowing countries but are “cosmetic” because exporters can compensate for the lower interest rate by raising the value of the export contract.
Country risk categories—used by all export credit agencies in ranking borrowing countries according to their perceived creditworthiness. Each agency has its own system, with a different number of categories, ranging in the case of the agencies surveyed from four to eight, often with additional subcategories; in each case, “category one” countries are those considered the best risks.
Cover—provision of export credit guarantee/insurance against risks of payments delays or nonpayments relating to export transactions. Cover is usually, though not always, provided both for commercial risk and for political risk. In most cases, cover is not provided for the full value of future debt-service payments; the percentage of cover typically is between 90 and 95 percent.
Cutoff date—established at the time of a country’s first Paris Club rescheduling. “Post-cutoff date debt” (loans contracted after the cutoff date) is not subject to rescheduling, and has priority in debt servicing over “pre-cutoff date debt” (loans contracted before that date).
Debt refinancing—procedure by which overdue payments or future debt-service obligations on an officially supported export credit are paid off using a new “refinancing” loan. The refinancing loan can be extended by the export credit agency, by a governmental institution, or by a commercial bank, and in the latter case will carry the guarantee of the export credit agency. Usually eschewed by agencies, but used recently in the case of Iran.
Debt rescheduling—procedure by which overdue payments or future debt-service obligations on an existing officially supported export credit are converted into a claim of the export credit agency on the debtor country carrying a revised stream of payments. Usually negotiated in the Paris Club. The standard approach in cases when a country experiences serious debt-servicing problems.
Debt restructuring—rescheduling or refinancing of debt-service payments in arrears and/or of future debt-service payments, undertaken in response to external payments difficulties.
Escrow accounts—accounts in offshore banks (outside the debtor country) through which a portion of the export proceeds of a debtor is channeled. Typically involve balances of one year to cover future debt-service payments. Creditors who are the beneficiaries of the accounts thus obtain extra security for their loans and priority on debt service.
Exposure—the total amount of debt of a country held by an export credit agency, including commitments, arrears, and unrecovered claims. Implicitly, a measure of the total possible financial cost to the agency of a complete default by the borrowing country.
Factoring—the sale of receivables by an exporter. The assets are sold at a discount to a factoring company that assumes all commercial and political risks, and has no recourse to the exporter in the event of the failure of the importer to make the due payments.
Forfaiting—the sale of promissory notes issued by an importer. The notes are endorsed by a commercial bank or by the central bank or government in the borrowing country, and are sold to a forfaiting company that carries all of the political risk with no recourse to the exporter in the event of the failure of the importer to make the due payments.
Grant element—a measure of the concessionality of a loan. It is defined by the OECD’s Development Assistance Committee (DAC) as the difference between the face value of the loan and the present value of the stream of repayments on that loan (discounted at a flat rate of 10 percent regardless of the currency of denomination), expressed as a percentage of the face value.
Guarantee—commitment by an export credit agency to reimburse a lender if the borrower fails to repay a loan. The lender pays a guarantee fee. While guarantees could be unconditional, they usually have conditions attached to them, so that in practice there is little distinction between credits that are guaranteed and credits that are subject to insurance (see below).
Helsinki Package—agreement reached by OECD participants of the Consensus limiting the use of tied-aid credits in certain countries to projects that would not be commercially viable without an aid element. The agreement also set up mechanisms for implementing the new rules. For further details see Appendix III.
Insurance—the main business of most agencies is insurance of finance provided by exporters or commercial creditors (though some major agencies lend on their own account). Insurance policies provide for the export credit agency to reimburse the lender for losses up to a certain percentage of the credit covered by the allowance and under certain conditions. Lenders or exporters pay a premium to the export credit agency.
Limited recourse financing—the financing of a major capital project in which the lender looks principally to the cash flow and earnings of the project as a source of funds for repayment and to the assets of the project as collateral for the loan, rather than to the general creditworthiness of the borrower. Often accompanied by escrow accounts (see above).
Mixed credits—credits containing an aid element, either in the form of a grant or of a subsidized interest rate. See also concessionality level above.
National interest account—account or system under which an export credit agency extends cover to certain transactions that are not considered eligible for cover on the basis of the normal criteria of the agency, because of the size or risk of the transaction involved. For example, cover may be extended under government instructions when the transaction is considered beneficial to the national economy, would promote social and economic progress in the buyer country, or when there is a special interest of the government.
OECD Export Credit and Credit Guarantees Group, OECD Trade Committee—a forum in which 22 OECD member countries participate in the Arrangement on Guidelines for Officially Supported Export Credits (the Consensus). Turkey and Mexico also attend this Group as observers. Aside from coordinating export credit terms, the OECD Export Credit Group has also served as a forum for exchange of information on debtor country situations and agencies’ practices; at the meetings of the Group the governmental authorities of the agencies are represented.
Offers—amounts for which an export credit agency is committed to provide cover if the exporter succeeds in obtaining a contract. Mostly refers to medium-term business because most agencies do not make offers in respect of normal short-term business.
Officially supported export credits—loans or credits to finance the export of goods and services for which an official export credit agency in the creditor country provides guarantees, insurance, or direct financing. Under OECD Consensus rules covering export credits with a duration of two years or more, up to 85 percent of the export contract value can be financed. The financing element—as opposed to the guarantee/insurance element—may derive from various sources. It can be extended by an exporter (suppliers’ credit), or through a commercial bank in the form of financial trade-related credit provided either to the supplier (also suppliers’ credit) or to the importer (buyers’ credit). It can also be extended directly by official institutions of the exporting countries, usually in the form of medium-term finance as a supplement to resources of the private sector, and generally for export promotion for capital equipment and large-scale, medium-term projects.
Paris Club—forum in which creditor countries meet with the debtor to consider a request for the rescheduling of debt-service payments on loans extended, insured or guaranteed by their governments or official agencies. The Paris Club has neither a fixed membership nor an institutional structure, and its meetings are open to all official creditors that accept its practices and procedures. During these meetings the participating creditors agree with the debtor country the broad terms of the rescheduling, which are set forth in an Agreed Minute and which the representatives agree to recommend to their respective governments.
Political risk—the risk of borrower country government actions that prevent, or delay, the repayment of export credits. Many export credit agencies also include under political risk such events as war, civil war, revolution, or other disturbances that prevent the exporter from performing under the supply contract or the buyer from making payment. Some also include physical disasters such as cyclones, floods, or earth-quakes.
Premium—the amount paid, usually in advance, by insured lenders as the price of the insurance. An important source of income for export credit agencies.
Preshipment risk—Preshipment, or more precisely precompletion, risk covers the exporter against the loss incurred if an export contract is unilaterally withdrawn by the importer. Such losses include the cost of inputs used and setup costs. This kind of cover is particularly important in the case of military exports and of major capital goods exports where setup costs are typically large and the manufacturing period is long.
Project financing—sometimes synonymous with limited recourse financing (see above). Sometimes used to describe a narrower set of projects cofinanced with other agencies or with multilateral institutions.
Provisioning—allowance made in some agencies’ accounts for the financial cost of possible losses on their exposure. Some agencies provision on all new business; some reject the idea of provisioning against political risk, maintaining that all sovereign debt will ultimately be repaid.
Quantitative limits—mechanisms by which agencies restrict the amount of cover offered to a particular country. Could, for example, take the form of limits on the total cover for a country or on the amount of cover offered for individual transactions. The limit set is an important means of limiting exposure to countries considered to be risky.
Recoveries—repayments made to agencies by borrowing countries after agencies have paid out claims to exporters or banks on the loans concerned.
Reinsurance—reinsurance by agencies of amounts originally insured, usually by a private sector insurer or commercial bank (though some large official agencies are also providing reinsurance for smaller official agencies). For example, a private insurer might keep the commercial risk of a loan on its own books, but seek reinsurance against specific political risks.
Repayment period/credit period—the period during which repayments under the financing are due to be made; this period usually starts after the end of performance under the commercial contract.
Securitization—securing of a loan or insured guaranteed credit by assets, often including through an escrow account (see above).
Security requirement—payment guarantee required by export credit agencies for extending cover in certain markets, varying primarily with the legal and administrative setting within the borrowing country. It could consist of an irrevocable letter of credit, a confirmed irrevocable letter of credit, a government guarantee, or a central bank guarantee.
Short-term commitments—commitments which provide for repayment within a short period, usually six months (though some agencies define short-term credits as those with repayment terms of up to one or two years). Usually relating to sales of consumer goods and raw materials, and usually taking the form of policies for whole turnover/comprehensive coverage (see also Box 5).
Specific policy—a policy covering an individual export contract against failure to receive sums due from the foreign buyer.
Subordination strategy—policy of Paris Club creditors that loans extended after the cutoff date are not subject to rescheduling; therefore, pre-cutoff date loans are effectively subordinated to new lending.
Suppliers’ credit—a financing arrangement under which an exporter extends credit to the buyer in the importing country.
Transfer risk—the risk that a borrower will not be able to convert local currency into foreign exchange, and so will be unable to make debt-service payments. The risk would usually arise from exchange restrictions imposed by the government in the borrower’s country. This is a particular kind of political risk (see above).
Whole turnover coverage/comprehensive coverage/global coverage—insurance or guarantee cover for all or a negotiated portion of the export transactions of a supplier (exporter) or bank. These policies generally provide insurance at a lower premium rate than specific policies because the risks for the agency are spread across a broader range of transactions and frequently across several debtor countries.
In this and past IMF staff papers on officially supported export credits, the quantitative analysis of developments has been based on three statistical sources: the Berne Union, the OECD, and agencies’ annual reports. All of these sources contain useful information, and both the Berne Union and the OECD have made, and are continuing to make, considerable efforts to improve the quality of their data in recent years. However, both rely ultimately on the individual agencies for data, and each agency uses definitions and concepts that differ in important ways. Given this, and given the different methodologies used by the Berne Union and OECD themselves, it is extremely difficult to reconcile data from different sources and to relate data on officially supported export credits to financing flows and debt stocks.
Difficulties also arise from the increasingly complex interlinkages among various channels of official bilateral financing. Such financing can take the form of direct credits or of insurance for credits funded by the private sector; in the latter case, a wide variety of instruments and institutional arrangements is used. Reschedulings and refinancings further complicate the picture, particularly in cases of concessional reschedulings, as do other forms of budgetary support, such as mixed credits. More fundamentally, there are few incentives for agencies to collect and compile detailed data in a form which in most cases is quite different from the way in which they keep their own books.
The Berne Union quarterly survey of agencies includes data for some 40 developing countries and economies in transition on outstanding commitments, arrears, unrecovered claims, outstanding offers, and new commitments during the last quarter from each member agency. Those data have been provided to the IMF staff on a confidential basis for its use in analyzing various aggregates for individual debtor countries.
The most attractive feature of the Berne Union series is that data are collected in the way most agencies actually keep their books; that is, the concept “commitments” encompasses insured principal and, in most cases, interest on undisbursed as well as disbursed credits. This facilitates consistency in reporting and avoids errors that can occur when agencies are asked to make estimates of statistical concepts for which they have no hard numbers. The Berne Union data have the advantage of being a leading indicator, in the sense that they include agencies’ commitments on undisbursed credits and are available with a substantially shorter time lag than data from other sources. The data also provide a breakdown of total exposure into commitments on outstanding credits (representing a risk of future claims) and arrears and unrecovered claims (resulting from nonpayment, and in the latter case, claims payments by agencies).
Among the limitations of the Berne Union data are that they are not readily comparable with other types of debt statistics and they do not accurately reflect trends in new disbursements. Some agencies do not report export credit activity on account of the government. On the other hand, the data include the insurance of certain transactions that are not exports, for example, insurance against exchange rate movements or insurance of preshipment risks, which do not involve export credits.37 Finally, the Berne Union only covers member agencies.38
The OECD compiles two types of data on export credits. The first are published in Statistics on External Indebtedness: Bank and Trade-Related Non-Bank External Claims on Individual Borrowing Countries and Territories, which the OECD prepares jointly with the Bank for International Settlements (BIS). The series was published for the first time in April 1984, and revised data are now available from December 1983 through June 1993. The series reports stocks of export credits on a basis broadly comparable with other external debt data, that is, covering outstanding amounts of disbursed principal only, and brings together the information available to the BIS on banking credits and to the OECD on export credits.39 However, since the concepts used do not reflect the way most export credit agencies keep their accounts, for certain creditor countries estimation by either the reporting country or the staff of the OECD is required. Moreover, the BIS-OECD data provide a breakdown of outstanding amounts among nonguaranteed bank claims, guaranteed bank claims, and nonbank officially supported export credits. However, official export credits can fall into either the second or third categories, both of which also contain other items.
The second set of data from the OECD is compiled by the Secretariat of the Export Credit Group. This records the flow of new commitments of export credits with initial maturities of over one year, and initial maturities of over five years, as well as the stock of officially supported short-term credits. These data, which are prepared for the OECD Export Credit Group, form the basis of the data shown in Table A1.
|Total of Category I (Largely Industrial) Countries||Category II (Middle-Income Developing) Countries||Category III (Low-Income Developing) Countries||Categories II and III (Developing Countries)||Total2|
|(Medium-and long-term credits with an initial term of over one year)3|
|(Long-Term credits with an initial term of over five years)3|
Problems in Interpreting Berne Union and OECD Data
The following general caveats need to be kept in mind in interpreting both the Berne Union and the OECD Export Credit Group data. First, since agencies typically provide insurance for both repayments of principal and payments of interest, data provided to the Berne Union and to the OECD export credit group are based on agencies’ exposure, including future interest payments.40 Second, agencies typically report at the time contracts are concluded the full value of the contract, including undisbursed amounts. Thus, it is difficult to relate commitment data to actual disbursements. Finally, data in agencies’ own annual reports should also be used with caution, since they often refer to the total value of exports supported, which includes down payments by the buyer as well as self-participation of the exporter in the credit.
Arrears and Reschedulings
In the event of nonpayment by the debtor, the agencies record the unpaid amounts of principal and interest first as arrears, and then, after the claims-waiting period and following claims payments, as “unrecovered claims.” However, interest accrued on arrears is generally not recorded as an increase in claims. Similarly, when unrecovered claims are regularized through a Paris Club rescheduling, agencies do not record an increase in exposure in their reports to either the OECD or the Berne Union, despite the fact that since repayment periods under Paris Club reschedulings are in most cases significantly longer than for export credits, the amount of future interest at risk is much larger. By contrast, if arrears or unrecovered claims are refinanced rather than rescheduled, the refinancing results in an increase in recorded exposure.
The series on the stock of commitments and the stock of disbursed credits prepared by both the OECD and the Berne Union are affected by variations among agencies in their treatments of arrears and restructured credits. Most agencies include arrears and rescheduled or otherwise restructured export credits (including capitalized interest) in their reports to the Berne Union and the OECD. However, some agencies exclude credits that are no longer the responsibility of the agencies in their reports. The treatment of debts rescheduled on concessional terms also varies across agencies. These variations make the reported numbers for countries that have experienced debt-servicing difficulties particularly difficult to interpret and generate a downward bias in the estimated stock of disbursed credits.
A further complication in the interpretation of the OECD and the Berne Union data concerns the treatment of mixed credits. All agencies report the commercial component of mixed credits in their returns. However, the institutional arrangements for providing mixed credits vary between creditor countries. Some arrange the financing by mixing concessional loans provided by the national aid agency with commercial export credits to achieve the desired level of concessionality; for these countries the data on export credits covers only the commercial loans. In contrast, other countries provide the whole of the financing in the form of commercial credits supported by cover from the export credit agency, but arrange for some part of the interest to be paid directly to the lender by the aid agency. For these countries the whole of the mixed credit will be reported as an export credit.
Exchange Rate Effects
The BIS/OECD also publishes estimates of the impact of exchange rate changes on flows of export credits. In principle these estimates allow the net effect of transactions on the change in reported stock to be identified. However, the methodology used is such that in practice, other factors, such as the treatment of arrears and debt reorganizations, also affect the stock.
The Arrangement on Guidelines for Officially Supported Export Credits, commonly called the “Consensus,” was established in 1978.41 The most recent modification was the “Schaerer Package,” which was agreed in August 1994.42 The Consensus defines a set of limits relating to the terms of officially supported export credits and requires prior notification to other Participant countries of “derogations” or “deviations,” that is, of credits extended by any one Participant on terms and conditions not conforming with the Guidelines. The Consensus gives the right to any Participant to match the terms of export credits deviating from these Guidelines (derogating credits). It also sets out in detail the procedures to be followed in prior notifications and in matching derogating credits. Finally, it provides guidelines for the conditions under which mixed credits (combining aid resources and commercial credits) can be granted.
Although the Arrangement places limits on the ability of agencies to subsidize exports with submarket interest rates, it does not set the terms and conditions of the insurance or guarantees issued in support of export credits. The Consensus is complemented by more limited “Sector Understandings” on export credits for ships, for civil aircraft, and for conventional and nuclear power plants. The Arrangement also does not apply to export credits relating to exports of military equipment and agricultural commodities.
The terms of export credits are differentiated by groups of recipient countries. Until August 1994 the Arrangement classified as Category I (relatively rich) all countries with a per capita gross national product (GNP) of over $4,000 per annum according to the final 1979 data published in the 1981 World Bank Atlas; as Category II (intermediate) all countries not classified in Categories I or III; and as Category III (relatively poor) all countries eligible for International Development Association (IDA) credits plus any low-income countries or territories whose GNP per capita would not exceed the IDA eligibility level. In August 1994. Participants agreed to simplify the classification of countries. There are now two categories, the first of which comprises countries that have graduated from World Bank lending, currently with a per capita GNP of over $4,715; the second comprises all other countries.
The four main elements concerning the terms under which agencies in participating countries provide cover are the following:
a minimum cash down payment of 15 percent of the export contract value payable by the importer at or before the date of taking physical possession of the goods;
a maximum repayment period of five years for Category I countries and ten years for Category II countries (before August 1994: eight and a half years for Category II countries and ten years for Category III countries), with principal repayments in equal semiannual installments beginning no later than six months after the starting point;
a set of currency-specific minimum interest rates applicable for conforming credits;43 and
a minimum concesstonality level for conforming tied and partially tied aid credits, including mixed credits, of 35 percent.44
The Consensus prohibits Participants from offering export credits that do not conform to the main conditions of the Arrangement concerning repayment terms, the minimum interest rates, or the minimum level of concessionality (“No-derogation engagement”).
Minimum Interest Rates
The elimination of interest rate subsidies has been one of the major aims of Participants in the Consensus. The mechanisms for achieving this have been refined several times. The original Arrangement had established a matrix of minimum interest rates which could only be adjusted by unanimous decision after negotiation—there was no provision for automatic adjustment to maintain the relationship with market rates. This problem was addressed when the Participants (after sharply increasing the fixed matrix rates in November 1981) adopted the Uniform Moving Matrix (UMM) in October 1983.45 To avoid placing credits denominated in low-interest rate currencies at a competitive disadvantage, the Participants also agreed to establish market-based CIRRs. The minimum interest rates at which Participants could provide export credits was the lower of the matrix rate and the CIRR of the currency in which the credit was denominated.46
|Jan. 83||Jan. 84||Jan. 85||Jan. 86||Jan. 87||Jan. 88||Jan. 89||Jan. 90||Jan. 91||Jan. 92||Jan. 93||Jan. 94||Jul. 94|
|U.S. dollar < 5yr3||…||13.20||12.72||10.38||7.57||9.35||9.99||8.65||8.63||7.09||6.21||5.54||7.27|
|U.S. dollar 5–8.5yr||…||13.20||12.72||10.38||7.97||9.75||10.39||9.05||9.03||7.49||7.08||6.15||7.70|
|U.S. dollar >8.5yr||…||13.20||12.72||10.38||7.97||9.75||10.39||9.05||9.03||7.49||7.46||6.48||7.91|
|New Zealand dollar||…||…||…||…||…||16.30||14.75||13.47||13.22||9.54||8.40||6.65||7.68|
In July 1987, the Participants agreed to replace the matrix minimum interest rate for export credits to relatively rich (Category I) countries with the appropriate CIRRs and to raise the minimum matrix for intermediate (Category II) and poor (Category III) countries by 50 basis points in order to reduce the subsidy element. Minimum matrix rates were later abolished altogether, and in August 1994 Participants agreed to abolish the SDR interest rate for credits to Category III countries over a 12-month period.
The original Arrangement followed the DAC criterion for determining the concessionality of tied- or partially tied aid credits, using a flat 10 percent discount rate. This gave countries with low-interest rate currencies a competitive advantage over countries with high-interest rate currencies: with low nominal interest rates, only small interest subsidies were required for official development assistance (ODA) loans to yield a high level of concessionality when discounted at the flat rate of 10 percent. Similarly, in the case of mixed credits, comparatively small amounts of pure grants had to be combined with a commercial loan to meet the required level of concessionality. To redress this situation, the Participants in the Consensus decided to adopt a currency-specific formula for the discount rate to be used in calculating the concessionality level of aid credits: the differential discount rate (DDR). For currencies where the CIRR is under 10 percent, the formula gives 75 percent weight to a market-related interest rate for each currency;47 the remaining 25 percent weight is assigned to the flat discount rate of 10 percent. The resulting discount rate thus more closely reflects market interest rates. In addition, the minimum concessionality level for Category III countries was raised to 50 percent, and for Category II countries to 30 percent on July 15, 1987, and to 35 percent a year later.48 In August 1994, a new method of calculating the DDR for currencies where the CIRR is less than 10 percent was adopted, and the minimum concessionality level for the new Category II set at 35 percent.
In March 1992, participants agreed on a major modification to the Consensus, often referred to as the Helsinki Package (agreement on the package had been reached under Finnish Chairmanship of the Participants of the Arrangement). This modification covered export credits involving tied or partially tied aid to low-income countries. The aim was to increase transparency and to improve the quality of tied-aid credits. The relevant modification to the OECD Consensus specifies:
Tied and partially untied concessional or aid credits, except for credits to LLDCs, shall not be extended to public and private projects that normally should be commercially viable if financed on Arrangement terms.
The key tests for such aid eligibility are (1) whether the project is commercially nonviable; and (2) whether it seems unlikely that the project can be financed on market or Arrangement terms.
The modification also established procedures for the implementation of the Helsinki Package through consultation. Projects involving tied aid of over SDR 50 million are automatically placed on the agenda of monthly consultations; Participants may also request consultations on any other project involving tied aid. Discussions have focused on the definition of commercial viability, which requires, in particular, judgments on appropriate pricing and project definition. Agencies found this case-by-case approach time-consuming, but saw it as generally working well in helping to establish guidelines for implementation and in weeding out projects that should not be financed through the use of aid. Agencies generally agreed that this process should in due course lead to a substantial reduction in the use of tied aid credits in the financing of commercially viable projects. However, they differed on whether the net result would be to free aid resources for the least developed countries, or merely result in a reallocation of aid within the current recipient countries to projects that do not fall under the strengthened guidelines.
In August 1994, the Participants in the Arrangement, under the chairmanship of Mr. Kurt Schaerer, agreed to a further series of measures which build on the Helsinki Package. An important element of the package was the abolition of the last subsidized interest rate, the SDR rate, which should have the effect of further limiting subsidized credits to the tied aid credits covered by the Helsinki Package. The Schaerer Package also contained measures designed to tighten and simplify the implementation of the earlier agreement, including restrictions on “grandfathering” of credits already in the pipeline when changes are made.
The August 1994 agreement also set in motion new work on areas not so far covered by the Consensus. In particular. Participants agreed to start discussions on export credits for agricultural products, and to establish an expert group in this area. The Participants also agreed to do further work on establishing guiding principles for setting premia and related conditions, another area which is not currently covered under the Consensus.
The role of export credit agencies in the debt strategy and in particular the policy reactions of agencies to countries that required reschedulings in the Paris Club have been the primary focus of previous IMF studies on export credits.49 Since 1976, official bilateral creditors have concluded well over 200 rescheduling agreements with 61 countries covering debt-service obligations of some $250 billion.50 This Appendix focuses on general issues arising from reschedulings and their links to cover policies, and in particular on agencies’ policies with regard to middle-income countries that have graduated or are well on their way toward graduation from the rescheduling process. Table A3 lists the current status of Paris Club rescheduling countries. Agencies’ policies on low-income rescheduling countries requiring debt reduction from official bilateral creditors are discussed in Chapter III.51
|Low-Income2||Lower Middle-Income3||Other Middle-Income||Total|
|Countries that have graduated from reschedulings|
|Gambia, The||9/87||Dominican Republic||3/93||Brazil||8/93|
|*||Viet Nam||12/93||5||El Salvador||9/91||Costa Rica||6/93||5|
|Poland||3/94||Trinidad and Tobago||3/91|
|Countries with rescheduling agreements in effect|
|*||Central Afr, Rep.||3/95||Jordan||5/97||Gabon||3/95|
|*||Côte d’Ivoire||3/97||Peru||3/96||Russian Federation||12/94|
|Countries with previous rescheduling agreements, hut without current rescheduling agreements, that have not graduated from reschedulings|
Until the mid-1980s, the normal practice of export credit agencies had been to go off cover for countries that sought a Paris Club rescheduling, and to wait for a return to full creditworthiness and establishment of normal relations before resuming cover on new credits. As it became evident that debt-servicing difficulties would not be resolved quickly by most rescheduling countries, official bilateral creditors needed to find ways not only to fill short-term financing gaps, but also to provide new credits for countries implementing adjustment programs.
The strategy of debt subordination developed by export credit agencies and their governments has realized these twin objectives. The cornerstone of this strategy was the policy of the Paris Club to maintain the cutoff date (set at the first rescheduling) in subsequent reschedulings, and to give clear priority to the servicing of post-cutoff date debts, even where that necessitated comprehensive reschedulings of interest payments and debt-service obligations arising from previous reschedulings. This strategy has been implemented consistently for ten years: since mid-1984 cutoff dates fixed at the first Paris Club rescheduling have not been changed in subsequent reschedulings. Two other aspects of the debt subordination strategy have been the exclusion of both short-term debt, and of credits extended to the private sector without the guarantee of the borrowing country government, from coverage under reschedulings.
This provided a framework in which export credit agencies could go ahead with new credits in confidence that these would not be caught up in future reschedulings but would be serviced on a timely basis. As most countries required repeat reschedulings, this has meant that, after the first rescheduling, there have not been significant interruptions in cover by export credit agencies provided that countries established a record of timely servicing of post-cutoff date debt and implementation of the rescheduling agreements. Continued, and often large-scale, support in the form of export credits has indeed been a crucial factor in assisting many middle-income countries (such as Mexico and Morocco) in resolving their debt difficulties and in making progress toward graduation from the rescheduling process.
Requests for Bilateral Reschedulings
Agencies noted that countries in evident debt-servicing difficulties that attempt to work out their problems without a Paris Club rescheduling posed particular difficulties. Nearly without exception, agencies refuse requests for reschedulings on a bilateral basis. Many agencies require a multilateral approach for legal reasons and also because of burden-sharing considerations. Moreover, obligations arising from reschedulings on a bilateral basis would be considered pre-cutoff date debt in the Paris Club and would thus be caught up again if a Paris Club rescheduling were eventually needed. Finally, there is the danger that cash-flow relief would be wasted in support of unsustainable policies: countries that request debt reschedulings on a bilateral basis do so often in order to avoid the adjustment measures required for the IMF programs which provide the basis for Paris Club reschedulings.
At the same time, however, agencies also fear that going off cover could cause the country to cease payments to them. They therefore tend to remain on cover, but on a more restricted basis, and typically for shorter maturities, as long as payments do not fall into arrears. This policy can have the perverse effect of dragging out a process where both adjustment and financing are insufficient. In such circumstances, the interests of both debtors and creditors would be served better if the borrowing country embarked on early and determined policy reforms supported by an IMF program and combined with appropriate cash-flow relief in the Paris Club.
Agencies also noted that there were cases of countries returning time and again to the Paris Club, while available cover for new credits remained unused. In some cases, this may reflect a reappraisal and restructuring of countries’ investment programs and can be expected to be temporary. In others, however, debtors continue to seek general budget and balance of payments support, including through reschedulings, to maintain levels of private and public consumption, while sources of finance for sound investment projects remain untapped. This tendency, some agencies thought, was reinforced by two factors. First, there remained the perception on the part of debtors that the Paris Club might provide concessions for a wider range of countries. Second, recent changes in budgetary and accounting procedures had for some agencies made reschedulings less expensive, from a budgetary perspective, than the extension of new credits. Agencies agreed that concessions were required for many low-income rescheduling cases (as discussed in Chapter III). But for basically creditworthy middle-income countries, including those in the lower-income range, they thought that clearer signals were required that countries with access to new financing should graduate from the Paris Club rescheduling process.
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The paper does not attempt to cover all aspects of export credits or to describe all facilities offered by export credit agencies. The focus of the paper is on export credits to developing countries and economies in transition. Intra-OECD business, which for many agencies is substantial, is not covered. Also, coverage is essentially confined to the export credit agencies visited. These agencies account for the bulk of officially supported export credits to developing countries and economies in transition, but there are other export credit agencies, including a number of agencies in developing countries, whose business has increased significantly in recent years. There are a number of sources on the organization of and services offered by individual export credit agencies, notably the OECD publication. The Export Credit Financing Systems in OECD Member Countries. Fourth Edition. 1990, an updated version of which is in the process of publication. Private sources include, for example. World Export Credit Guide (1994), a supplement to Project and Trade Finance magazine.
Throughout this paper the convention is adopted of referring to the activities, policy stance, and financial position of the export credit agency. It should be understood that the agencies have varying degrees of independence in these matters and that where the agency is a private firm the reference is exclusively to its government-mandated business. The term “guardian authorities” is used to refer to the ministry or ministries under whose guidance the agency operates or that are represented on its board of directors. The relationship between export credit agencies and governments is discussed in Box 2.
According to a recent comprehensive survey of external indebtedness by the OECD. The main data sources used in this paper are the OECD, the Berne Union (The International Union of Credit and Investment Insurers), and published and other material produced by individual export credit agencies. The problems that arise in analyzing the volume of export credits from the available statistics are discussed in Appendix II.
Agencies’ portfolios are typically concentrated on countries that fall into one of two categories: low-risk markets with high import potential, or high-risk markets where exporters are already well-established or where the exporting country has particularly strong political interests.
The idea that export promotion can be a powerful tool to combat domestic recession is not new: many agencies were founded in the 1930s for just this reason.
The accounting systems and practices of agencies vary widely, reflecting in large part differences in institutional arrangements. While an increasing number of agencies have been moving to accounting systems that establish provisions and include measures of the expected recovery of claims, and in particular of arrears and restructured claims, other systems are kept on a cash basis and thus do not allow assessments of financial positions on an accrual basis. Net cash flow remains therefore the only indicator for which data are available on a reasonably consistent basis.
An example of this approach is the decision by the U.K. Export Credit Guarantee Department (ECGD) to divide its trading accounts into two, to enable a clear distinction to be made between new and old business. According to ECGD’s Annual Report for 1992/93. ECGD’s financial objective for Account Number 1, which comprises mostly guarantees issued prior to April 1991, is to “manage the portfolio of assets and liabilities so as to minimize the cost to the taxpayer.” The financial objective for Account Number 2, which includes only guarantees issued from April 1991 onward, is “to build up and maintain sufficient reserves on new business to give the level of assurance of break-even required by Ministers.”
Other examples of the approach include a similar separation of old and new business by EKN of Sweden and the new system of risk assessment and provisioning put in place for U.S. Eximbank under the Federal Credit Reform Act of 1990.
Agencies cover a wide variety of risks, as described in Box 1, but they see political risk (often referred to by agencies as ‘country risk”) as the most important risk in medium- and long-term financing to developing countries.
For further details on risk-sharing techniques, see Box 4.
This system is shared by U.S. agencies and government departments and is used to determine budgetary allocations required under the provisions of the Federal Credit Reform Act of 1990 for all new credits and contingent liabilities.
Agencies generally consider IMF staff medium-term scenarios as useful benchmarks, but also observed that they typically made downward adjustments in their own medium-term projections to correct for what they saw as an optimistic bias resulting from the assumption of full implementation of adjustment programs.
Some agencies also observe closely ratings of bond issues and secondary market prices of commercial bank debt of borrowing countries.
Furthermore, most agencies will only provide cover for exports from their own countries. An important exception is the Export-Import Bank of Japan (Japan Eximbank), which has moved increasingly toward untied financing in recent years.
The OECD Consensus and its recent modifications, including the recent move toward streamlining current country classifications, are described in more detail in Appendix III.
Agreement on this modification had been reached in 1991 under the Finnish Chairmanship of the Participants of the Arrangement.
The discussions center around the conformity with the guidelines of individual projects. The standards and definitions on, inter alia, “commercial viability” and “projects” are currently being worked out on the basis of “case law” and precedent, and while the body of experience is growing, specific guidelines are not yet firmly established.
Exporters typically agree to the lower interest rate but compensate by raising the invoiced price of exported goods, so that the importing country is unlikely to gain much.
Agencies’ policies toward rescheduling countries more generally are discussed in Appendix IV. “Low-income rescheduling countries” are those for which the Paris Club has agreed reschedulings on concessional terms.
Assessments of commercial risk generally focus on the creditworthiness of the buyer, or of a guaranteeing commercial bank However, commercial risk can also be affected by economic developments in the country concerned. For example, a substantial devaluation of the currency that greatly increased the domestic currency cost of external debt service might reduce the creditworthiness of a borrower.
For some agencies this is not a new practice. Among other countries for which some agencies offer better terms on credits to the private sector are Argentina. Brazil, Côte d’lvoire, and Kenya (see Tables 2 and 3).
The same agency also commented that it differentiated its cover policy for specific Brazilian public buyers according to the payments record of the buyers.
The U.S. Eximbank and Russia have signed a framework agreement under which loans or guarantees would be provided to Russia’s 24 oil production associations and to Gazprom, the state-owned gas producer, for the rehabilitation of oil and gas production operations. Escrow accounts will be established to collateralize the loans, containing funds equivalent to 150 percent of annual debt-service payments. U.S. Eximbank estimates that total lending under the agreement might be $2 billion, though this is not a limit.
EID/MITI has committed a $2.9 billion line of credit to Russia for loans secured by escrow accounts. As with U.S. Eximbank, the focus is on oil and gas, and Gazprom has so far been the major recipient of loans (commitments of $700 million up to November 1993). Both the U.S. Eximbank and the EID/MITI agreements include a letter of undertaking from the Russian government to the effect that export licenses will be issued, so that the export credit agencies can deal directly with producer organizations.
SACE has reached an agreement whereby Italian exports with a contract value of $1.9 billion will be supplied to Gazprom. Repayment will be made through an escrow account, with the additional security that the extra supplies of gas engendered by the new equipment will be exported to Italy.
In the Paris Club, debt subordination is achieved by fixing a cutoff date at the lime of the first rescheduling: debt contracted after this date is exempt from future reschedulings and must be serviced in full: debt contracted before this date can be covered under rescheduling agreements. For the past ten years, the Paris Club has maintained cutoff dates fixed in all cases of repeat reschedulings. Most agencies view the fixity of cutoff dates as essential for them to consider new lending to rescheduling countries. This issue is discussed further in Appendix IV.
Cover policy refers to the terms and conditions under which export credit agencies are prepared to offer insurance or guarantees for export credits, or, in some cases, to provide the financing themselves.
This approach is consistent with the theory of asymmetric information. Agencies face the problems of adverse selection and moral hazard in assuming the risk of nonpayment by borrowers about whose creditworthiness they have limited information. To mitigate the information problem, they employ quantitative rationing instruments in combination with variable premia.
The stance of cover policies toward economies in transition is discussed below.
Some of these restrictions are more important than others, so that the number of agencies imposing restrictions does not in itself fully capture the overall tightness of cover policies.
The figures understate support by agencies because the Berne Union data do not cover Japan Eximbank and other lending in the form of untied financing.
Most agencies have recently concluded refinancing agreements with Iran on a purely bilateral basis, with overall maturities ranging up to five years.
The data presented here do not bring out the extent of this shift for Algeria, where many agencies extended credits classified as medium term, but with a very short average maturity.
Algeria agreed a rescheduling with the Paris Club in June 1994 that provided for repayments over 16 years with a graduated repayment schedule.
It should also be noted that the share of short-term commitments in total exposure is much larger in the case of Iran than in the other countries discussed here.
The Philippines concluded a Paris Club agreement in July 1994.
A fall in new commitments may also reflect a change in the borrowing country’s financing strategy, or the increased availability of other forms of finance. For example, Hungary, Korea, and Thailand have received relatively small amounts of officially supported export credits, but this reflects low demand from these countries, and the fact that in some cases lenders were prepared to offer finance (including export credits) without official support.
The Berne Union data cover only export credits extended through member agencies. They do not cover other government agencies involved in export credit finance for specific products (such as the Commodity Credit Corporation in the United States or the Canadian Wheat Board). In most cases, this imparts only a small bias to the aggregate data. The differences are more substantial in the case of Russia and the U.S.S.R., but do not affect the basic analysis.
Preshipment risk cover is prevalent in the case of military exports that are generally characterized by long preshipment risk periods followed by cash payment.
Excluding notably Japan Eximbank, though all but a small part of ex-port credits financed by Japan Eximbank are covered by insurance from EID/MITI and are thus included in the Berne Union data. It should be noted that most Japan Eximbank lending in recent years has not been related to exports. Commodity and other credits extended by U.S. agencies such as the Commodity Credit Corporation or the Department of Defense, and, for example, by the Canadian Wheat Board, are also not covered.
The BIS-OECD data cover the U.S. Commodity Credit Corporation and direct lending by institutions such as Japan Eximbank, hut the coverage is not exhaustive; for example, credits from the Canadian Wheat Board are not included. The BIS and the OECD, together with the Fund and the World Bank, are engaged in the International Working Group on External Debt Statistics, whose work is focused on concepts and measurement issues in this area.
Future interest payments typically account for some 25 percent of total commitments. This is, for example, consistent with an interest rate of 7 percent, an average maturity of 5 years and repayment in equal installments as required under the OECD Consensus rules. However, long-term commitments may involve a stream of interest payments that account for a much greater share of total commitments.
This section is based on the “Arrangement on Guidelines for Officially Supported Export Credits” (Paris: OECD. June 1992); and discussions with the staff of the OECD.
A description of developments in the Consensus during the 1980s can be found in Appendix IV of Officially Supported Export Credits, World Economic and Financial Survey series (Washington: International Monetary Fund, May 1990).
These interest rates are the relevant Commercial Interest Reference Rates (CIRRs) shown in Table A2. Until August 1995, in the case of Category III countries, participants have the option of choosing an SDR-based interest rate computed by the OECD, irrespective of the currency of the export credit.
The minimum concessionality level is 50 percent if the beneficiary country is defined as a Least Developed Country (LLDC) by the United Nations.
The UMM established a single matrix of minimum interest rates that moved automatically as market rates fluctuated, and applied to all currencies used for extending export credits.
The CIRR is set for each currency at a margin above a base rate defined as the yield on the secondary market for government bonds with a residual maturity of five years, except where the participants agree otherwise. The margin was formerly set at a fixed 100 basis points, but since August 1994 has been set at 75–125 basis points, depending on the length of the repayment period. Participants notify the OECD Secretariat of changes in the CIRRs each month, and changes in the CIRRs are implemented as necessary on the fifteenth day after the end of each month.
The average of monthly CIRRs for the currency during the six months preceding the fixing of the DDRs, which are set for one year on each January 15.
If the tied or partially lied credit is in the form of a financing package, combining concessional loans or grants or other official flows with a purely commercial credit, the overall concessionality level is calculated as a weighted average of the concessionality levels of each component.
See in particular Chapter III of Officially Supported Export Credits, op. cit.
These figures overstate the impact of reschedulings on the exposure of export credit agencies, because part of the debts rescheduled were obligations on ODA loans by bilateral aid agencies. The figures also include reschedulings of obligations arising from previous reschedulings in cases where countries experienced persistent payments difficulties.
A comprehensive review of the recent evolution of Paris Club reschedulings can be found in Official Financing for Developing Countries, World Economic and Financial Survey series (Washington: International Monetary Fund, April 1994).