In broad terms, the agencies share the economic objectives of export promotion and maintenance of financial balance (i.e., the self-supporting principle) over the medium term. In practice, differences in emphasis exist within one agency over time, as well as among the agencies at any given time. The balancing of the two economic considerations may vary from agency to agency, depending on the domestic economic setting at the time, the institutional arrangement and degree of financial autonomy, and the philosophical and historical perspectives.

Objectives of the Agencies

In broad terms, the agencies share the economic objectives of export promotion and maintenance of financial balance (i.e., the self-supporting principle) over the medium term. In practice, differences in emphasis exist within one agency over time, as well as among the agencies at any given time. The balancing of the two economic considerations may vary from agency to agency, depending on the domestic economic setting at the time, the institutional arrangement and degree of financial autonomy, and the philosophical and historical perspectives.

Export credit insurance is accepted by the General Agreement on Tariffs and Trade (GATT) as a legitimate form of export promotion but not as a form of export subsidy. From time to time, agencies might find it necessary to shift policy emphasis away from their strict financial objectives toward a more active support of exports. Such a shift might occur in circumstances of high domestic unemployment overall or in the exporting industries alone. It also might occur where there is weak export performance and a weak balance of payments position. The agencies articulated the conflicting pressures to avoid a loss of market or to protect market shares, to preserve employment at home, and to adhere to strict financial and economic considerations. Most stressed the practical difficulties in striking a proper balance among these factors.

The flexibility of the agencies in policy application also varies with the degree of financial autonomy. Some agencies are statutorily required to be self-sufficient and must adhere strictly to commercial principles—at least over the medium term. Several are supported by the national budget and need to conform to the normal process of national budgetary control and discipline. A few are financially more independent and can resort to market borrowing. These agencies face fewer immediate financial constraints, are in a position to view shorter-term financial considerations more flexibly, and have more room for maneuver. The application of policy differs among agencies, reflecting national philosophy and preferences with regard to the style of economic management and the desired degree of state intervention.

In addition to economic considerations, a few of the agencies indicated that, at times, the overriding policy considerations may be primarily strategic and political. For most of the agencies, principal policy and country decisions are made by a larger interministerial group that represents the diverse interests of the nation. Most of the agencies cited specific instances where national interests played a major role and where exceptional measures were taken, overriding purely commercial risk standards.

The weight given to noneconomic factors varies across agencies. It ranges from a formal legislative requirement to maintain market presence in the national interest under well-defined situations to an informal understanding on the part of the agencies that market presence would be in the national interest. In several agencies, separate accounts are maintained for transactions that are exceptionally risky, exceptionally large, or taken with noneconomic objectives; these are known variously as national interest or state accounts.

Traditional Considerations Guiding Cover Policy

A move to modify terms and conditions of cover policy (i.e., provision of insurance/guarantee) may be triggered by a number of factors. The link between the triggering events and specific policy reactions is not rigid within one agency and varies across agencies. Within an agency, from case to case, emphasis could shift among the various relevant considerations, depending on the debtor country, the type of financing facility, and the project. Some agencies suggested that for short-term business (i.e., whole-turnover policies), the agency’s claims experience might be emphasized, while for medium-term loans the general economic situation of the borrowing country over the longer term might be emphasized. Across agencies, there could be different perceptions of the risk involved, as subjective elements were unavoidable in risk assessment. However, certain tendencies and considerations appeared to be widely shared.

General Country Assessment

All of the agencies suggested that an overall country risk assessment generally would have a pervasive influence on cover policy decisions. Normally, an agency makes a risk assessment of a debtor country based on both economic and noneconomic criteria. Procedures for such an assessment range from periodic reviews (at regular intervals for most agencies) to those carried out on an ad hoc basis when a specific need arises. Until the debt crisis of 1982, economic assessments generally focused on historical analysis and the current financial and external payments position of the country; efforts have since been made to look further ahead in such assessments (see section on More Comprehensive Risk Assessment, below). A few agencies employ quantitative indicators to guide their operations—for example, selected financial ratios such as the debt service ratio or the import coverage of reserves—while others maintain country exposure limits based on qualitative economic indicators. Noneconomic assessments usually concentrate on geopolitical and strategic aspects, and are made on a qualitative basis.

The agencies noted the practical difficulties they have experienced in denying credit applications merely on the strength of an unfavorable country risk assessment. Frequently, in a competitive environment, restrictive actions could not be introduced in the absence of such clearly negative factors as heavy claims payments to insured lenders or a debt rescheduling.

Transfer Delays

All of the agencies indicated that the nature, magnitude, and trend of transfer delays together constituted the prime basis for tightening terms of cover. Transfer delays may not lead to restrictive actions unless the delay is beyond what is administratively customary in the market. Also, agencies may have deferred restrictive actions if the delays were for small amounts, were isolated cases, and were not growing. Moreover, agencies may defer actions in a crucial commercial market by accommodating transfer delays through an extension of the claims-waiting period.

For an individual agency, significant and rising transfer delays to the agency itself were critical elements for policy decisions and would normally result in prompt restrictive actions. Difficult decisions arise when transfer delays emerge—not for the agency itself but for other agencies. In these instances, the agency with no significant arrears would closely examine the situation and might not take restrictive actions unless such arrears became widespread and substantial among agencies.

It is notable that the agencies seemed to consider payments delays as the major deciding factor in taking restrictive action. Some agencies noted that, at times, restrictive actions had been taken before significant arrears emerged, but this was likely to be the exception. In virtually all of the sample countries in the study, the agencies’ experience had been for a strict tightening of cover policy whenever substantial arrears emerged and persisted over an extended period. Moreover, most agencies wanted arrears settled largely, if not completely, before a relaxation of the terms of cover would be considered. From an administrative and policy standpoint, several agencies noted that their decisions in this regard were quite clear-cut. Serious transfer delays that result in heavy claims payments have a direct negative financial impact and constitute a powerful argument against such other factors as exporters’ resistance to a hardening of the terms of cover. Also, some agencies may have no other option, as strict legal constraints prevent them from continuing cover while claims are being paid. Even in the absence of a statutory requirement, the agencies operate under the long-standing principle that insurance cannot be given against the certainty of loss.

Attitudes of Other Agencies

There was a consensus that the attitudes of the other Berne Union agencies were an important factor in an individual agency’s policy decisions. The agencies described the existence of an extensive network through which they informally consult with each other regarding actions being contemplated for a specific transaction, or general policies for a particular market. Among agencies, policies are not coordinated in a formal sense, and the actions resulting from consultations may be very dissimilar, as each of the agencies may have its own considerations.

Although policy reactions are not uniform, the agencies appear to take the views of the other agencies into consideration to quite a considerable extent. In particular, those agencies with a relatively small market share may look to the larger agencies for a lead, if only because the larger agencies are regarded as better placed at assessing risk since they have a more comprehensive information base. Several agencies also cited their experiences with being out of step with other agencies, especially being the last agency out of a deteriorating market, and thereby finding sudden jumps in exposure arising from the spillover of the demand unmet by others. These agencies were then faced with a situation that quickly went out of control, and they experienced sharp rises in their market shares that eventually resulted in substantial financial losses.

Attitudes of Other Creditors

Most of the agencies described as a relevant policy consideration the attitudes of other creditors. The attitudes of the commercial banks are especially important for decisions concerning countries that are major borrowers in the capital markets. The agencies cited instances of bank payments moratoria leading directly to the introduction of restrictive terms of cover for medium-term business and cautious attitudes for short-term business.

Generally, when a debt-restructuring negotiation with the commercial banks is under way, the agencies adopt a wait-and-see attitude and defer approval of transactions (at least for medium-term projects) until the outcome has been clarified. After the bank rescheduling agreement, the agencies review the overall situation and take action on that basis. Active financial involvement of the commercial banks in resolving debt difficulties in a country could be viewed as a positive factor. Also relevant for policy decisions are the probability and the magnitude of debt relief extended by official creditors outside of the Berne Union, and financial assistance provided by organizations such as the Fund and the World Bank.

Debt Reschedulings

An approach to the Paris Club for a debt rescheduling, or a rumor of an impending approach, may cause uneasiness, but the agencies may not take restrictive action immediately. Depending on the level of and trends in exposure in a particular market and the amounts of offers or preliminary commitments, a variety of holding actions is feasible. However, when a debt rescheduling has been confirmed, or when an official rescheduling request has been made, most agencies would suspend cover. By the date of the multilateral rescheduling discussions, at the latest, most of the agencies would be off cover.

The comprehensiveness of the cover suspension would depend on the scope and type of debt that is rescheduled. Normally, and for most agencies, at least medium-term cover would be suspended, but short-term cover could be retained, depending on whether the country had met and was seen to be able to meet its short-term obligations. The link between the suspension of cover and debt rescheduling has evolved since the debt difficulties of 1982 and is discussed in more detail in Chapter III.

Role of the Fund

In assessing the economic outlook of a debtor country facing debt-servicing difficulties, all of the agencies take account of the relations of the country with the Fund. Most agencies regarded as positive factors for policy decisions the existence of a Fund-supported adjustment program with conditionality in the upper credit tranches and prompt negotiations on such an adjustment program. Apparent failure to agree on an economic program, or the apparent unwillingness of a country to enter into negotiations on such a program, could have a negative influence on policy decisions by the agencies. Moreover, when a program is in place, the country’s failure to comply with the performance criteria of the program would also be a negative sign, and, in some agencies, would often trigger the tightening of the terms of cover. The test of compliance with the performance criteria is viewed by agencies not in a mechanistic way but rather in terms of the country not reaching agreement with the Fund on additional policy measures that might be necessary.

A few agencies also indicated that on occasion they had relied on the limits on the accumulation of external debt in Fund-supported adjustment programs as an important factor for restraining exposure in a particular country. Some agencies have also used these ceilings in their internal planning of the incremental volumes of business in a country.

The influence of a debtor country’s relations with the Fund on the policy decisions of the agencies is considerably weaker with regard to countries that are not encountering debt-servicing difficulties. Very few agencies indicated that they had relied on information such as the general economic policy appraisals contained in the Fund’s Article IV consultation reports to obtain advance signals on the financial outlook of a borrowing country. In general, there was a feeling that in the absence of negative claims experience, competitive pressures were such that the agencies could not move to restrict cover on the strength of necessarily imprecise advance signals and imperfect forecast of the medium-term outlook.

Policy Measures and Impact on Exposure

The degree of policy restrictiveness depends on the interplay of the various considerations described above. For an individual borrowing country, the policy reactions and the precise mix of measures depend, among other things, on the country circumstances and the agency’s internal procedures. Across agencies, the diversity of policy reactions also depends on noneconomic conditions and on the level and trend of each agency’s exposure in the market, including the outstanding volume of offers.2

The influence of noneconomic factors cannot be quantified but can be very important in select cases in terms of willingness from the national perspective to maintain political and commercial presence in a particular market. Similarly, the influence of the level and trend of exposure on cover policy decisions is complex. At both the conceptual and practical levels, the link between exposure and policy reactions is ambiguous. For a country where the agency maintains a particularly large market share, and where the country risk weighs heavily in the agency’s own portfolio, the agency faces a difficult policy choice from a conceptual standpoint. One extreme is for the agency to attempt to improve the quality of risks by continuing to increase its exposure in the expectation that this will prevent a debt crisis at a later stage. The other extreme is for the agency to regard the existing market share and the portfolio concentration as excessive and in need of correction, and it may tighten the terms of cover to reduce its exposure.

The primary objective of cover policy decisions is to guide the level of exposure in a particular market, ranging in degree from controlling the rate of increase in exposure to effecting a desired rate of reduction. The traditional instruments for modifying exposure can be grouped under two headings: (i) supply measures, intended to directly affect the agency’s level of commitments, and (ii) pricing measures, intended to influence demand for cover and thereby indirectly the level of commitments. The outcome of pricing measures may be different from the intent, since the underlying demand factors cannot be accurately predicted, and any attempt at fine-tuning by reliance on the indirect measures may prove unsuccessful. Agency preference for a particular set of measures may follow tradition, as well as such economic criteria as the portfolio of the agencies, the concentration of business in credits of particular maturities, and other financial considerations. These aspects are beyond the scope of the present study. Typical measures to tighten policies and their relative effectiveness are described briefly below; see also Appendix II.

Supply Measures

The supply measure most used is ceilings on commitments, primarily of medium-term and long-term maturities, which can be variously applied. For practical reasons, ceilings on short-term commitments have been rare and, when employed, they are usually revolving limits. Most agencies maintain individual country limits (formal or informal) in terms of total commitments/exposure. As a next more restrictive step and sometimes used in addition to limits on total exposure are ceilings on the amount of new commitments during a specified period, generally for a year or less. Limits can also be used in the reopening phase, as indirect signals to the exporters concerning the agency’s willingness and interest in a market. Various ceilings to control exposure have been utilized by some agencies as part of an internationally coordinated arrangement to assist some debtor countries. Ceilings on an individual transaction are used by some major agencies, but rarely by the smaller agencies, and only in extreme circumstances when the agency is effectively, if not formally, off cover.

Additional security could be called for by an agency as a condition for cover. The security varies with the legal and administrative setup of the borrowing country rather than with the preference of the agencies. Frequently, the security is an irrevocable letter of credit, if there is sufficient assurance that the issuance of such a document is effectively controlled by the debtor country. If not, a confirmed irrevocable letter of credit could be required, that is, confirmed by a third-country bank or a bank of the agency’s choosing; in these circumstances, the agency is effectively off cover since the cross-border risk has been transmitted to the confirming institution. With the recent debt-servicing difficulties, public sector guarantee is being used more frequently by the agencies, reflecting their experience of a better record of servicing of the debt owed or guaranteed by the public sector than that owed by the private sector. This development could reflect the priority accorded to the public sector in foreign exchange allocations, or it could reflect the fact that the poor economic situation in the borrowing country has worsened the commercial risks for the private sector borrowers. In extreme cases, agencies have also required external or third-country guarantors for unique transactions and other forms of collateral requirements, such as mortgages on real properties or tying the provision of cover to the retention of foreign exchange earned by the project (e.g., through escrow accounts).

Along with imposing commitment limits and security requirements, the agencies normally withdraw authority delegated to banks or underwriters. They also tend to assess more carefully the commercial creditworthiness of the private buyers, since these buyers are more vulnerable in countries facing difficult economic circumstances. The next move might be to apply more stringent criteria for project selection, with priority given, or cover confined, to selected buyers, economic sectors, or projects with a direct foreign exchange linkage, or with more compelling economic justification.

Most agencies view the case-by-case approach, that is, considering each application for financing or insurance on its own merits, as an important step in their restrictive actions. A main exception is one agency that applies the case-by-case approach as a matter of general policy, since it does not rely on ceilings on commitments as do the other agencies. For most, the case-by-case approach is adopted usually in the transitional phase, when a firm restrictive policy decision is being deferred, or when a more open cover policy is being considered. Agencies also reported having adopted this approach from time to time as a practical, and politically expedient, alternative to a formal off-cover policy. Under this approach, the agencies could in practice suspend cover by rejecting applications on a case-by-case basis.

The most restrictive supply measure is the suspension of cover, usually but not necessarily, first on long-term, then on medium-term, and finally on short-term transactions. When cover is suspended, the agencies would normally continue to honor preliminary offers that become commercially successful. Outstanding offers would be allowed to lapse when the business is not received by the exporter and would not be renewed, and new offers would not be entertained. While disbursements on outstanding commitments would generally proceed on schedule, most agencies could choose to stop disbursements, depending on the project or the type of goods. Some agencies suggested that for standardized products disbursements may be suspended with less difficulty than for customized products or turnkey projects. Only rarely would the agencies take the extreme measure of halting disbursements, for example, by stopping shipments by whole-turnover policy holders or halting work orders for exporters. The general view is that, except in a situation of hostility, suspending disbursement would not be feasible, since it would unfairly pass the burden on to the exporter.

Pricing Measures

Pricing measures have two direct elements, the basic insurance premium and the surcharge, and a variety of indirect elements, for example, varying the claims-waiting period and the percentage cover.

Several agencies, especially the major ones, do not rely heavily on pricing measures to help limit exposure. Various and, at times, conflicting reasons were cited for this position, mainly that the burden on exporters could not be justified domestically by the agencies. One agency felt that the improvement in its financial position through a practical (and politically feasible) price increase would be so marginal as to not be worthwhile. This is especially true if the demand for cover is so elastic that the high prices would result only in deep cuts in volume. In contrast, another agency suggested that, in its own experience, pricing measures had not been effective in checking demand and controlling exposure, since cover demand was seen to be price-insensitive.

A few of the agencies maintain a premium structure that provides a direct link between the rate of premium and the perceived degree of country risk. For these agencies, the premium rates vary in direct proportion to the country risks, and, as a country’s risk deteriorates, the market can be downgraded to effect a higher premium charge. This risk-differentiating feature helps agencies to limit exposure in riskier markets through dampening demand, while ensuring that cover is rationed in an economically efficient manner and that trade is directed to stronger markets.

Some agencies apply a flat-rate premium structure across countries, without differentiating for risk levels. They believe that, on strict insurance principles, the rate differentials required to fully compensate for the different risks among countries would be prohibitive and politically infeasible; for high-risk countries, the hypothetical premium differential could be in excess of 20 percentage points. It was considered that the flat-rate structure had the overriding advantage of political expediency—in avoiding being seen to openly differentiate among countries, with attendant foreign policy repercussions. There was no general agreement among the agencies on the optimum premium structure, and agencies tend to maintain a premium structure tailored to their domestic circumstances. Aside from the basic premium, many agencies reported having imposed premium surcharges on an ad hoc basis to help limit exposure and to partially compensate for the increased cost of providing cover in exceptionally risky situations.

As an indirect pricing measure, all agencies have extended the claims-waiting period (beyond that which is customary for the market) as a restrictive move, to signal to exporters the agencies’ attitudes toward a particular market. In the event of uncertainties, extending the claims-waiting period would buy time as a transitional measure and provide a financial respite for agencies through deferring payment of claims. Most agencies could reduce the percentage cover (i.e., the percentage of any loss suffered by the exporter on which the agency would pay claims) in an effort to dampen exporters’ demand for cover; this is achieved through a higher proportion of risk being borne by the exporters. As a relatively effective fine-tuning measure, agencies can reduce the percentage cover in steps, from a normal 90 to 95 percent down to as low as 70 percent, beyond which the required degree of self-insurance becomes prohibitive.

Policy Impact on Exposure

The agencies noted some of the practical difficulties in accurately predicting and measuring the impact of their cover policies on their exposure in a borrowing country; the only exception was direct control on the level of commitments. The unpredictability of the underlying demand for cover is the main factor that makes ex ante analysis of exposure very difficult. In particular, in a difficult and uncertain payments situation, the exporters could perceive deteriorating risk in trade without cover, and for an agency there could result an upward shift in the overall demand for cover. In this case, without strict ceilings on the level of commitments, the agency’s exposure could continue to rise in spite of its restrictive policy stance. Conversely, when demand is slack, the agency’s exposure could decline even though it is following a liberal policy. Similar difficulties could also arise if irregular and lumpy transactions (e.g., for exceptionally large projects) were concluded after the policy stance had turned restrictive. In all of these instances, the exposure level and trend would distort the underlying policy intent.

In principle, the underlying demand trend could be approximated by an analysis of the changes over time in the proportion of national exports covered by insurance. However, in practice, such an analysis is usually flawed, for several technical reasons. For medium-term exposure, an analysis is not feasible without detailed information on the leads and lags in the disbursements (not just commitments) and the relevant trade flows. For short-term exposure, an analysis of demand relative to national exports may be more manageable than that for medium-term exposure, but only under certain simplifying assumptions—for example, that the relationship between commitments and disbursements does not change significantly over time and that the leads and lags between disbursements and trade flows average out over a longer period, such as one year.

The difficulties of measuring policy impact are further compounded in the comparative context across agencies. Aside from technical problems, there is an added complication of ascertaining the precise policy intention and actual practices of other agencies. This is especially difficult if the other agencies have adopted a case-by-case approach, which, in a practical sense, may range from the intention of moderate restriction to an effective off cover. Also, the quality and the scope of risks covered by each agency may differ in practical terms.

Some of the agencies indicated that at times they have relied on certain data as a rough approximation of the relative degree of policy restrictiveness across agencies. Some have analyzed the variations over time in the proportion of offers that materialize in successful commercial contracts. In the case of Mexico in 1983, the individual agency’s percentage of successful offers was not altered significantly, thus suggesting that there was no substantive change in the relative competitive strength and in the market shares across agencies. This outcome was consistent with the prior informal understanding among the agencies to continue cover in step with each other. In other circumstances, an evident shift in the proportion of effective covers, and eventually in the market shares, could indicate that certain agencies are out of step with the others. Several agencies described sharp shifts in their market shares in a very short period as a result of their relatively liberal policies compared with other agencies, combined with the existence of a strong trade link.

The detailed country discussion in Appendix I recognizes the ambiguity in the interpretation of exposure data. Nonetheless, it relies on the variations over time in the ratio of short-term commitments to national exports as a partial indicator of the degree of policy restrictiveness.