Repercussions of Recent Debt Difficulties
There was a consensus among the agencies that the recent debt-servicing difficulties have seriously affected the agencies’ financial operations and have influenced the application of cover policy in important ways. The process through which the agencies adapted to the changed environment has been variously described as a metamorphosis or as a learning process. Several agencies considered that they were still adapting, with a few suggesting that there was room for significant improvement in what was seen to have been an ad hoc process.
It was generally agreed that, while the payments difficulties before 1982 had been confined to a few countries and had been regarded as country-specific, the payments problems since 1982 had become more general. These recent difficulties have already resulted in a record number and scale of reschedulings under the Paris Club framework of debt owed to official creditors.
Financially, the debt reschedulings and the attendant heavy claims payments by the agencies have led to a sharp deterioration in their financial position. Eight agencies drew particular attention to the occurrence, for the first time in their history, of substantial trading losses or operating deficits measured on a cash basis. These large deficits were expected to persist over the next few years, given the current debt outlook for many of the debtor countries. For the two agencies that did not report a significant financial loss, the burden of debt rescheduling had not been openly apparent only because the accounting was on an accrual basis.
On the application of cover policy, all of the agencies have felt the need to adapt their traditional practices and attitudes to the changed environment. They noted that the customary continued strict adherance to risk standards and limits would have led them to confine support to an unduly narrow range of export markets. Already, several of the agencies have faced substantial declines in the volume of business. An application of policies not adapted to the changed environment could also have compounded the economic difficulties and the debt-servicing problems of debtor countries and would have been counterproductive. Some agencies drew attention to the need by the agencies to contribute to international financial stability, by helping to achieve an orderly resolution of the current debt-servicing difficulties while preserving international financial discipline. For these reasons, and in spite of their difficult internal financial situation, the agencies, in varying degrees and at various times, have become convinced of the need to be pragmatic and to exercise flexibility in the application of their policies.
Measures to Improve Agency Finances
The agencies have attempted to improve their financial positions and to enhance their ability to be more flexible. They have examined financial alternatives and have taken significant steps in the financial area. These steps include raising revenues, containing risks, and broadening the scope of borrowing to cover their own deficits.
Revenue-Raising Measures
In an attempt to raise revenue, most of the agencies reported that they had made an upward adjustment in the premium rate structure since 1983. It is significant that most reported that these increases were implemented for the first time in some thirty years. In some cases, the rate increases had been delayed under domestic resistance from interested parties. The increases in the premium rate structure have ranged from a low of 5 percent on average for an agency that has made a gradual rate adjustment over the years to a high of 40 percent for an agency that took the step for the first time in many years.3
Aside from across-the-board premium rate increases, some agencies have sharpened the risk-differentiating features of their premium rate structures. For a few agencies, the rate differentials among countries in different risk categories have been widened substantially, with exceptionally high premium rates now applicable to high-risk or rescheduling countries. Even among those agencies that do not subscribe to the principle of risk-differentiating premium structures, there has been an attempt partially to account for part of the higher risk involved in certain instances. These efforts have involved primarily premium surcharges introduced on an ad hoc basis and ranging from as low as 10 percent to as high as 100 percent of the basic rates.
In addition to the premium rate structure, the agencies have attempted to improve their revenue performance in indirect ways. For example, the rates of interest applied to consolidation amounts under debt reschedulings (which had tended to contain concessional elements in the past) have, in more recent years, moved toward current market rates in nearly all cases, although some debtor countries are pressing for moratorium interest rates at levels close to the cost of government funding.
Risk-Containing Measures
The agencies have attempted to contain risks through the use of traditional risk-containing instruments and, for some agencies, through experimentation with new risk-sharing arrangements with exporters, commercial banks, and the borrowers.
The agencies appeared to have made a greater use of the traditional means of reducing the proportion of transactions eligible for insurance cover. However, some observed that a reduced percentage cover below 90 percent was generally difficult to achieve. Several indicated that for many problem countries the percentage cover had been reduced to 70 percent, the lowest possible level before the degree of self-insurance became prohibitive and the intent of the insurance thereby nullified. In making such difficult decisions, distinctions have had to be made among exporters. The reduction in percentage cover was seen by most as an effective means to contain risks, but this measure was not always successful in helping to limit exposure. Other indirect techniques for containing risks have been employed, such as extending the claims-waiting period and improving the quality of risk through requirements of security or collateral.
In general terms, some agencies have not used more active pricing and risk-containing instruments to ration cover. They felt that the burden would be too great for the exporters to bear in the present context of a mixed credit and aid assistance offered by an increasing number of national authorities. Also, the percentage cover should not be reduced in the attempt to limit exposure, as this would happen just when the exporters needed to be provided as much help for as long as possible. During the upturn or reopening phase, the reduced percentage cover might be used more frequently to test market willingness and the quality of risk.
Increasingly, some agencies have experimented with innovative forms of risk-sharing arrangements. For instance, for one country in the recovery phase, one agency was pursuing a risk-sharing arrangement with commercial banks; initially, the risk-sharing formula was 50/50, but was later altered to 60/40. For other agencies, discussions were under way to share risks with banks and consortia of private insurance companies. Overall, the feeling was that such arrangements would be limited in scope.
Several agencies reported greater flexibility through increased use of special accounts (such as the national interest or state accounts). These accounts had enabled the agencies to continue to provide cover for exceptionally risky transactions or for rescheduling countries. It was pointed out, however, that transactions accepted under state accounts were not without limit, since these accounts must conform to national budgetary control and discipline, and all agencies must comply with the requirement of the General Agreement on Tariffs and Trade that export credit schemes not be run on a subsidized basis.
Deficit Financing
Several agencies have financed their deficits through direct national budgetary contributions. Others have made recent special arrangements that empower them to borrow from public financial institutions or in capital markets to finance their deficits. This added borrowing ability has allowed several agencies to accept more risk than otherwise possible.
Adaptations in Cover Policy Decisions
Most agencies reported having taken actions toward greater flexibility since 1983. The approaches have varied, depending on institutional arrangements and the domestic setting, ranging from formal government decisions to an informal evolution of practices. One major agency recently was able to make major policy changes only after the relevant export financing legislation had been amended to permit borrowing to finance its deficits. For another major agency, specific cabinet decisions had been taken to formalize the new policy guidelines with a shift in policy emphasis toward domestic employment and foreign market share considerations, and for the agency to accept higher risk and potentially larger budgetary implications. Another major agency reformulated its policy by redefining the concept of “reasonable chances of repayment” to permit more flexible cover policy decisions. One agency had full flexibility and could modify policy decisions in the consultative context within the government without legislative action.
The agencies described the various practical effects of the more flexible approaches adopted since 1983. In general, the operational borderline between off cover and on cover was now much less clear-cut, and there was more selectivity in reactions and timing. More specifically, the practical effects can be described under four main headings: (i) more comprehensive risk assessment; (ii) broader scope for responses to Paris Club (or other similar official creditor group) reschedulings; (iii) resumption of normal cover policies; and (iv) participation in internationally coordinated efforts.
More Comprehensive Risk Assessment
For most agencies, risk assessment has become more systematic and more comprehensive to allow finer distinctions among borrowing countries as a basis for a range of cover policy decisions. In addition, the agencies have begun to closely monitor countries to permit resumption of cover as soon as possible.
Risk assessment in the past had, in practical terms, centered on the claims experience of the agencies, and the main operational objective was to limit risk and to minimize claims payouts. As a result, there was a tendency to react sharply and automatically to any debt rescheduling, and cover had been suspended for countries with prospects of repeated reschedulings. However, the current debt situation has underscored the dilemma faced by all the agencies, namely, assuming further risk in difficult situations versus a loss of export markets. The agencies have attempted to refine the method of country risk assessment to better guide cover policy decisions in difficult cases.
With a more comprehensive risk assessment, the agencies have subdivided borrowing countries into more detailed policy categories. For the satisfactory markets with reasonable assurances of repayment, cover policies would be normal. For uncertain markets, cover policies would vary depending on whether the country was facing a liquidity problem, hence in the category of transitional markets, or whether it was facing longer-term difficulties, hence in the category of difficult markets.
For the transitional or liquidity cases, the agencies closely monitor developments, and policies evolve to become more or less liberal as the situation warrants. Important considerations for the agencies would be whether appropriate adjustment policies were in place for attaining medium-term payments viability. In this connection, at least two agencies indicated their readiness to maintain some cover for countries with a near-term probability of debt reschedulings, provided that credible efforts were being made to redress current difficulties. For most agencies, credible efforts needed to be in evidence through adherence to Fund-supported adjustment programs to assure medium-term prospects.
For difficult markets having a dim long-term outlook and, irrespective of current adjustment policies, where repeated reschedulings were all but certain, cover policies would tend to be very restrictive. In these instances, policy decisions would be quite clear-cut: only very limited cover would be provided and only on noneconomic considerations.
For a few agencies, the list of relevant risk factors for policy decisions has been expanded to include such leading economic indicators as the medium-term debt-servicing ability and the quality of economic management. In this connection, some agencies observed that, owing to staffing constraints, such a comprehensive risk appraisal still left room for improvement. In this context, attention was drawn to improved coverage in Fund papers of medium-term balance of payments scenarios and external debt outlooks.
Despite some progress in the forward-looking aspect of risk assessment, the agencies acknowledged that there remained an inherent weakness in policy application on the basis of such an assessment. The weakness was particularly notable for countries not yet in evident debt difficulties but pursuing policies that could lead to serious problems. All of the agencies experienced difficulties in introducing sufficiently restrictive policies on the basis of leading indicators, such as the direction of financial policies being followed by the debtor country and the medium-term debt outlook (see, e.g., Argentina, Nigeria, and Peru, Appendix I). Even when the advance warning signals were seen as quite conclusive, an individual agency often considered itself precluded from tightening terms of cover ahead of other agencies, for obvious employment and competitive reasons. Furthermore, each agency tended to feel that its own action might be only marginal in the overall outcome. There was a general feeling that the agencies as a group should not move to prematurely restrict cover, as the move could become a self-fulfilling prophecy.
The agencies recognized that the inherent tendency for them as a group to stay open too long in the situations described could contribute to an excessive debt buildup. They were also aware that, where adjustment was needed, a continued availability of liberal financing could delay necessary adjustment. There was general agreement that the international financial system would be strengthened if ways could be found for the agencies as a group to gradually limit increases in flows of new credits to countries once the leading indicators pointed to impending difficulties. In this way, the debtor countries would be encouraged to take more timely and less severe adjustment measures, and excessive debt buildups could be avoided.
Responses to Paris Club Reschedulings
Most of the agencies stressed that, while there may appear to be typical policy responses to a Paris Club debt rescheduling (or a similar official debt rescheduling forum),4 these responses should not be regarded as firm operating rules, since there were always important exceptions. Policy decisions for a particular debtor country were taken on a case-by-case basis and tailored to the country’s specific circumstances.
Until 1982, there had been fewer and less complex debt reschedulings, and the agencies may have been able to operate under better-defined guidelines. The recent proliferation of debt reschedulings and the changed circumstances have made it inappropriate for the agencies to strictly adhere to past guidelines. Furthermore, the fluidity of the situation means that the agencies have not yet formulated guidelines on all relevant policy aspects. Most appeared to take the view that in this transitional environment flexibility and broad policy options were appropriate, while many were still exploring policy alternatives, and, in time, new policy initiatives and practices could reasonably be expected. As a result of the recent debt difficulties, the agencies seemed to have broadened their scope and increased their options for retaining cover for rescheduling countries, and long-standing rules appear to have been relaxed.
The typical responses to debt reschedulings appear to be as follows. When a country approaches the Paris Club (or a similar forum, such as the OECD Consortium) for a rescheduling, the export credit agencies normally (and, for most, automatically) withdraw cover—at least for the specific types of debt subject to (or considered likely to be subject to) the rescheduling. A continuation of cover on the types of debt subject to rescheduling is possible only on an exceptional basis, primarily on national interest considerations. More recently a few of the smaller agencies have experimented with retaining limited cover even for the types of debt that had been rescheduled (see Peru, Appendix I). Their experiences have been mixed and the results as yet too limited for any firm assessment of their future intentions. Several considerations favor these restrictive responses: there is a need to protect the agencies’ financial positions and to limit risks in rescheduling countries; there is a need to maintain international financial discipline and to avoid a proliferation of debt reschedulings if they were obtained at too easy terms; and there is a need to avoid providing excessive assistance to debtor countries in the form of easily available new credits on top of debt relief, and to gear assistance to an equitable burden sharing among creditors.
The agencies may continue to provide cover for the types of debt not subject to the rescheduling arrangement provided that certain additional conditions are fulfilled. The most significant application of this policy is the provision of short-term cover. All of the agencies appeared ready to maintain short-term cover unless such debt had been rescheduled, and provided that there were no outstanding arrears and the country was judged likely to remain current on its short-term transactions. This practice has traditionally been followed by several agencies and has recently gained even wider acceptance (e.g., see, Brazil, Mexico, and Peru, Appendix I). In particular, one major agency which had hitherto withdrawn cover on all transactions irrespective of the coverage of the debt rescheduling arrangement has recently formally adopted this approach. It was prepared to consider maintaining short-term cover for rescheduling countries and was expecting to accommodate significant increases in demand for cover that might occur.
Other applications of this general policy are less well established, although they are also becoming widespread, as evidenced by the experiences with the countries in the sample. Several agencies appeared to have made an even finer distinction among types of debt. For Mexico, as an example, most agencies were able to maintain cover for public sector debt, the type of which had not been rescheduled. Similar principles seemed to apply for arrears; for example, for Venezuela, the existence of arrears on the private sector debt led most agencies to be restrictive on the private debt, while some agencies were able for a time to continue providing cover for the public sector debt (Appendix I).
This flexibility in cover retention is a welcome development in cases where countries are pursuing effective adjustment. The agencies’ readiness under certain conditions to continue short-term cover would support the debtor countries in their adjustment process by assuring financing for essential imports (see, e.g., Brazil, Appendix I). Although trade credits should not be regarded as a source of balance of payments financing, the absence of short-term cover would become a drain on the foreign exchange resources of the debtor countries and represents a negative balance of payments financing that should be avoided. Also welcome are other refinements in the matching of cover provisions with the type of debt not subject to rescheduling and therefore in accordance with the debtor countries’ own efforts. These steps help to strengthen international cooperation by supporting those debtor countries that are making special attempts to resolve their difficulties.
In this context, there was general agreement that in the period ahead the demand for cover could increase significantly, reflecting a system-wide deterioration in risk rather than country-specific factors, and the agencies could be faced with a substantial increase in exposure. In principle, it was generally agreed that an increased reliance by exporters and commercial banks on trade finance was to be welcomed and was preferable to the commercial bank (balance of payments) financing of the late 1970s and the early 1980s. To the greatest possible extent, the agencies were interested in seeing banks and exporters extend trade finance at their risk and without official cover. At the same time, the agencies were not under global liability limits that would prevent them from accommodating significant increases in demand for credits. In application, the views of agencies appeared to be more diverse. Some agencies have already accepted significant increases in demand for cover from commercial banks for transactions that were previously conducted by banks at their own risk (see, e.g., the Philippines, Appendix I), and still others indicated that a general increase in demand was expected and would be accommodated. Other agencies indicated an unwillingness to accept sharp increases in demand for cover, if these increases reflected a spillover of demand unmet by other agencies, or if they were to reflect a shift in financing terms from cash to credit. Overall, most of the agencies appeared ready to accommodate a system-wide increase in demand, for example, for short-term cover for a rescheduling country, provided that the actions of other agencies were broadly similar.
Resumption of Normal Cover Policies
Average Length of Cover Interruption
The speed of the resumption of normal cover has varied across debtor countries and has depended on the specific circumstances and the progress made in economic adjustment. For the countries in the case study, the length of cover interruption (measured from the time of the Paris Club multilateral agreement) ranged from as short as one year for Peru to an effective interruption of over four years for Turkey.
Most of the agencies felt that the concept of an average length of cover interruption served no useful policy purpose, as decisions needed to be made on a case-by-case basis. From a purely administrative standpoint, a typical period of cover interruption could last about two to three years. Moreover, as noted earlier, the agencies were never completely off cover for several debtor countries. When selective cover was maintained, this served to further blur the practical interpretation of the concept of cover interruption.
Criteria for Resumption of Cover
Generally, normal cover policies will be resumed after the agencies have perceived an improvement in assurance of repayment and the debtor’s creditworthiness has been re-established. Aside from this general principle, most of the agencies were hesitant to be more specific, since the precise conditions for each debtor country and each agency vary with their respective circumstances. The agencies indicated that their policies and practices in this regard generally, and concerning debt reschedulings in particular, have been evolving as a result of the debt difficulties since 1982. At present, they share certain preconditions for cover restoration, which may be described broadly as follows.
First, the bilateral rescheduling agreements should normally be in force and any downpayments should have been received. For some agencies, the bilateral agreements should also be successfully implemented; for example, the downpayments should have been made on time and there should have been a substantial, if not complete, regularization of arrears.
Second, no delays in payments for current transactions should occur.
Third, a satisfactory economic adjustment program should be in place, which should provide a reasonable prospect of demonstrable economic improvement over an adequate period. Most of the agencies regarded the adjustment program as credible when supported by Fund resources with upper credit tranche conditionality, and viewed compliance with Fund programs as demonstrating satisfactory performance.
Fourth, the medium-term economic outlook should be favorable, providing a reasonable assurance that future debt-service obligations would be honored.
Fifth, a favorable political climate should exist and market share considerations should be significant.
Even though these preconditions normally would apply, there are exceptions when, on a case-by-case basis, agencies may not require complete fulfillment of such preconditions before resumption of normal cover for a particular country. On the other hand, a few agencies stressed additional relevant criteria. For a few agencies, the debt consolidation period should come to an end. These agencies are statutorily prevented from resuming cover during the debt consolidation period while claims payments are being made. The relationship between the debtor country and the commercial bank creditors (or other relevant major groups of creditors) should be sound. Either inadequate or excessive commercial bank involvement in the period of debt difficulties could be construed as a negative sign. Aside from intercreditor equity, inadequate bank involvement casts doubts on the ability of the borrowing country to resolve its liquidity problem. Excessive bank involvement raises the possibility of the borrowing country relying too readily on financing, rather than on economic adjustment, and merely postpones rather than resolves the debt-servicing difficulties.
The Reopening Phase
After the preconditions have been met, cover would be resumed in a cautious and step-by-step manner. A typical phasing-in pattern might consist of (i) reinstituting short-term cover on a limited basis for raw material imports, with the added condition of an irrevocable letter of credit; (ii) reintroducing medium-term cover, perhaps with initial small transaction limits which could gradually be increased, and under progressively more relaxed conditions; (iii) gradually increasing the percentage cover; and (iv) gradually increasing country commitment limits.
A few agencies drew attention to special problems that have arisen in the context of the recent debt difficulties. In recognition of the need to avoid repeating past mistakes of financing unproductive projects, project appraisal techniques have generally been strengthened, and for some agencies (where applicable) transaction and country limits have been defined at more prudent levels. Some of the agencies indicated the need for assistance in ensuring that the provision of new export credits would be confined to priority projects, and several felt the need for a clearer notion of priority projects worthy of support. Also, there was a general feeling that there was scope for a more consistent policy approach among agencies on a case-by-case basis when moving toward resuming medium-term cover for rescheduling countries.
Some of the major agencies have taken special measures to overcome the difficulties of project selection. For instance, in the case of Turkey (Appendix I), one major agency has tried preselecting projects for cover by limiting the transaction size and by specifying limits for selected projects to be covered. Another major agency has been able to transfer project selection to the debtor country authorities. However, some agencies stressed the impracticality of such attempts. The limits on transaction size would not provide adequate guidance, and all agencies are not in a position to request that the debtor country authorities undertake the task of project prescreening according to certain criteria. Thus, these agencies indicated that they would welcome closer international cooperation in identifying high-priority projects for countries for which normal credit access was being restored.
In general, the agencies acknowledged that effective restraints and controls on appropriate investment financing could not be expected to result from individual creditor initiatives, given the strength of competitive pressures. The initiatives needed to come from the debtor countries through self-imposed restraints, with expertise provided by impartial multilateral organizations such as the World Bank. These restraints by the debtor country may be in the form of defining and adopting an investment plan of sound projects and appropriate size.
Internationally Coordinated Arrangements
In recent years, all of the agencies have participated in some of the arrangements coordinated internationally on a case-by-case basis to provide special assistance to some debtor countries. The experiences with the arrangements for four countries—Brazil, Mexico, Turkey, and Yugoslavia—were discussed during the course of the study (for details, see the respective country notes in Appendix I).
In principle, broad support existed for the idea of arranging a concerted international financing exercise on an exceptional basis for countries prepared to take adjustment measures. Aside from the agencies’ own specific national interests, other important considerations for agencies to provide assistance as a preventive exercise are to avoid a liquidity crisis and to set the basis for preventing future reschedulings. In practical terms, however, most of the agencies stressed that certain features of the arrangements undertaken so far should be avoided in future attempts to assist countries in an exceptional context, and some also stressed that sovereignty in decision making must be maintained.
In the first instance and at the conceptual level, most of the agencies argued that trade financing should not be used as balance of payments financing, for several reasons. Medium-term export credits would not constitute an effective instrument of balance of payments financing, since credit flows follow commitments after considerable delay. During the adjustment phase, there may not be much demand from the debtor country for medium-term project financing. For short-term export credits (which could be considered balance of payments financing in the sense that their absence constitutes negative financing), a special international arrangement would be redundant, since the agencies were already predisposed to maintaining short-term cover provided that appropriate conditions were fulfilled. Even if trade credits could be used for balance of payments financing, there were practical difficulties in accurately estimating the ex ante financing requirement and in establishing the appropriate individual agencies’ commitments.
For the above reasons, most agencies felt that case-by-case international arrangements should not be conceived as an integral part of a financing package to fill a financing gap, with specific target amounts pledged by individual agencies. They felt the effort for Brazil was a one-time exceptional undertaking. Also, a few of the agencies expressed strong reservations about an evolution whereby the Fund became an international pledging forum for export credits.
At a pragmatic level, most of the agencies cited considerations relevant to the shape of future internationally coordinated attempts. It was felt that an informal and unofficial attempt to arrive at a consistent policy approach on a strictly case-by-case basis was more expedient and could be achieved more easily (e.g., the 1982 effort for Mexico). Informal and internal commitment targets could be administered more flexibly, and some agencies preferred to avoid a formal public announcement of their intentions so as to leave open the option of policy adjustment—for either more or less restriction—as the situation evolved. A general view was held that the case-by-case approach should not entail the provision of credit on soft or abnormal terms, for example, three-to-five-year credit terms for consumer goods that were normally covered under short-term credits (e.g., the 1983 Yugoslavia arrangement). Except for one agency that had close trading links and fewer administrative encumbrances in dealing with the debtor country, commitments with abnormal credit terms had not been much utilized. This was caused in part by restricted demand from the borrowing countries and in part by administrative safeguards that had to be introduced by the agencies. Most of the agencies were conceptually opposed to the provision of credit on abnormal terms to countries in difficulties, since there was a risk of proliferation of softer terms to creditworthy countries and a general degeneration of the terms structure for export credit, circumventing established international understandings.
Implications of Agency Practices for Debtor Countries
The agencies indicated that they had not individually made known to any debtor country policy and operational practices that might have a direct bearing on the country. Clearly, policy options for a particular debtor country were confidential and exclusively governmental decisions. National authorities have taken care not to be seen as declaring specific preferred actions for any debtor country that could enable the country to maximize the provision of export credit cover. This type of action would not be viewed as appropriate, since the risk of abuse would complicate relations with the debtor country. On an exceptional basis and for a country with whom there were special historical and trade ties, some of the agencies may have made informal efforts to explore alternatives and advise on the various policy ramifications. Informally and at a high political level, a debtor country may have been advised of the desirability of adopting a Fund-supported adjustment program. Also, some of the agencies may have explained to their national exporters the basis of their specific policy decisions.
While most of the agencies have certain common views and practices, as a group (e.g., within the context of the Berne Union or the OECD Export Credit Group) they have not taken steps to explain these views or to make their practices known to the debtor countries. Informally and over time, certain information has been filtered through the Paris Club chairmanship on behalf of all creditors.
The debtor countries may have inadequate knowledge of a “preferred approach” (from the perspective of the agencies) that could help them to maintain cover. Frequently, in their contacts with the Fund staff, the debtor countries have requested advice on matters directly concerning export credits and reschedulings. It is also clear from recent experience that, owing partly to inadequate information, some debtor countries may have taken actions that turned out to be counterproductive, in that the disruption of credit and trade flows became more severe than warranted. A notable example is the tendency for some debtor countries to take extreme positions regarding the Paris Club rescheduling terms, owing in part to uncertainties concerning the potential availability of new cover and prospects for credit flows. These positions could jeopardize the agencies’ ability to retain some cover, a distortion in the trade pattern could ensue, and the debtor countries could be faced with a deterioration in their terms of trade—through implicit risk premiums on import prices—as exporters attempt to reflect in their pricing the risks involved in uninsured trade.
There was some support for the idea that, from a broader perspective, an improved awareness by the debtor countries of the “ground rules” would be desirable. Already, such “rules” could be discerned from the discussions on the general practices of the agencies and from specific experiences with the debtor countries in the study. They concern practical and operational issues, in addition to the fundamental need for the debtor countries to adopt appropriate adjustment policies and the long-standing principle against a rescheduling of debt on a unilateral or bilateral basis. The following are some of the approaches which could help the debtor countries gain the cooperation of the export credit agencies in maintaining cover on a selective basis.
Link Between Reschedulings and the Provision and Terms of New Cover
A close link exists between the coverage of a debt rescheduling and the scope and type of insurance cover that the agencies can maintain. As noted earlier, a clear link exists in regard to the provision of short-term cover, and a rescheduling country, through its own action, could maximize its chances of continued short-term cover and could avoid a worsening in its terms of trade. Some countries might also succeed in obtaining cover for the public sector debt if that type of debt is excluded from the Paris Club rescheduling.
A debtor country might be advised against seeking an advance in the cutoff date5 for successive reschedulings, since such a step could lead the agencies to impose severely restrictive policies intended only for countries in chronic debt-servicing difficulty. In these circumstances, the agencies could withdraw cover except for the most essential imports under special accounts and on noneconomic grounds (see Madagascar, Appendix I). It should be noted, however, that a debtor country’s prior commitment not to advance the cutoff date may not necessarily induce the agencies to reintroduce medium-term cover, as such a commitment must be seen as credible in the context of the debtor’s medium-term prospects.
The link is much less clear between the overall terms of a rescheduling and the agencies’ readiness to provide further cover. Nonetheless, a few agencies felt that when a debtor had chosen to confine the coverage of the rescheduling to only the principal amount (rather than to include, as customary in the Paris Club framework, the interest due), this action had positively influenced their attitudes and decisions, in that the narrow rescheduling coverage was indicative of a milder degree of difficulty and an improved outlook for the debtor country (see, e.g., Yugoslavia, Appendix I). Moreover, it appears that for some agencies, the softer the terms and conditions provided at a Paris Club rescheduling, the harder could become the terms and conditions attached to the provision of new cover. Against this background, a debtor country would be well advised not to view debt rescheduling as a low-cost option in its overall financial planning, and to explore as far as feasible the relevant trade-offs between debt reschedulings and the terms and conditions of new cover.
Link Between Debtor Countries’ Other Actions and General Attitudes of the Agencies
Several instances were cited in which the attitudes of the agencies were favorably influenced by actions taken by the debtor country. Most frequently indicated as a positive factor by the agencies was the effectiveness of communication maintained by the debtor country in explaining its financial and economic situation and its plan to overcome its problems; better record-keeping and analysis of the economic situation is also helpful. The Philippines was cited as a case where deficient information and communication at the initial stages had adversely affected some agencies’ decisions. Also cited was Romania, where inadequate communication and resultant uncertainty had led some agencies to overreact to protect against a worst possible scenario, and to become more restrictive than eventually was found necessary. On the other hand, several agencies were able to point to specific instances where more flexible efforts were made possible by effective communication (see Mexico, Appendix I).
Another positive factor is for the debtor country to clearly state its intentions concerning debt rescheduling and not to attempt to stop payment before making its intentions clear. Prompt conclusion, both of negotiations on a Fund-supported program and the Paris Club exercise, once these are found necessary, is considered helpful. Instances were cited when payments moratoria had been declared, but the move toward Paris Club discussions had stalled, thus creating uncertainties (see Nigeria and Philippines, Appendix I). In some of these circumstances, the agencies’ actions may have already been more flexible in anticipation of a speedy conclusion of a Paris Club agreement, and protracted Fund negotiations and delayed Paris Club discussions only meant that the agencies could further tighten their cover policies; when the eventual agreements are reached, speedy policy relaxation could not necessarily be expected in these situations.
It is also considered helpful if attempts are made by the debtor country to allocate foreign exchange across domestic borrowers on an equitable basis. The agencies cited as important factors in their restrictive decisions vis-a-vis Venezuela the discriminatory treatment given to private sector borrowers, and the apparent absence of “best efforts” to deal with the situation of payments arrears (Appendix I).
A few of the agencies also cited as an important factor the willingness of the debtor countries to adopt a sound debt-management policy. In particular, some of them felt that the debtor country might be encouraged to maintain a better debt information system, including data on uninsured short-term credits. Finally, in the recovery phase, the debtor country might be encouraged to establish a priority investment plan, possibly in coordination with, or with the expertise of, the World Bank.