The Berne Union
federates the major export credit agencies. It has recently published
its yearbook 2013 that describes what happened in the industry in the
past year. Here are the main points:
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Banks lack
liquidity.
In 2013, banks had
difficulties financing trade. This was especially true for long-term,
USD, and investment projects.
How did ECAs react?
They developed (more or less) direct lending programs:
- They encouraged investors to refinance trade finance banks through securitization guarantee schemes. The major example is Euler Hermes' securitization guarantee scheme.
- ECAs provided loans directly to exporters.
- Many ECAs put working capital covers in place.
- The European Commission installed a regime for short-term trade credit insurance under the premise that private insurance coverage is insufficient.
Naturally, ECAs only
intervene to fill the gaps of commercial markets, not to displace
private market appetite.
Basel III
compromises trade finance.
In 2013, the Basel
Committee continued discussing new bank capital requirements. The
leverage ratio (a minimum of capital that banks must hold, as
compared to their total exposure) created particularly strong
reactions in the trade finance community.
The basic idea of the
leverage ratio is to set absolute minimum standards, i.e. exposure =
exposure, irrespective of the risk involved. As trade finance
involves low risk (and low margin), the community didn't like the new
leverage ratio. It argued (and, in the end, succeeded), that banks
would lend less to the real economy (trade finance = real economy!),
as a consequence of the leverage ratio.
Both commercial
risk and political risk are omnipresent.
The yearbook points out
that political risk often realizes as a surprise, despite
improving statistical analysis tools. However, the Berne Union writes
that countries with authoritarian or totalitarian regimes tend to be
particularly vulnerable.
In terms of country
risk, this is not only linked to the sovereign's solvency but,
more and more, to its technical capacity to pay. Moreover, country
risk and obligor risk often overlap, especially when quasi-sovereign
entities such as Dubai World or systemically important banks are
involved.
ECAs brave
frontier markets.
Which countries were
particularly relevant in 2013 or will become important for ECAs?
- The Berne Union sticks to so-called frontier markets such as Vietnam, Gabon, Ghana, Nigeria, Kenya, Tanzania, Congo, Mongolia, and Zambia.
- With the rise of inter-Asian trade, ECAs expect the continent becoming more important in the near future.
- Due to its strong growth, Latin America is considered a promising market for export and investment insurance in the next decade. Top markets today are Brazil, Bermuda (cruise ship registration), Mexico, Panama, and Argentina.
(More or less)
meaningful quotes and buzzwords
The annual report is a
marketing document and, as such, contains many nice business
language. Some make me think, others simply make me laugh. Please
judge yourself:
“Credit and
investment insurers stand by their customers in difficult times, and
grow with their customers in more prosperous times.”
“Both commercial risk
and political risk are omnipresent.”
“The world of
plentiful liquidity, low borrowing spreads, and high risk appetite
that we experienced until 2007 will not come back any time soon.”
“Some risk management
models may be too complicated: By reducing complexity, accuracy may
improve. Risk management in the export credit business is relatively
easy: It is a business with large and concentrated exposures.
Monitoring requires simple tools.”
“Notwithstanding the
benefits of improving technology and risk management techniques and
software, political risk will always remain difficult to predict.”
“Good underwriting is
more an art than a science.”
“In general when
analyzing risks in developed countries we tend to emphasize the
credit risk of the buyer or the borrower and not consider
sufficiently the functioning of the banking sector or foreign
exchange market and other political risks related to the host
country.”
“If we [export credit
agencies] cannot get in the space and really understand the evolving
needs for proper capital relief within banks' trade, export, and
project finance teams, we [export credit agencies] will lose our
relevance at the end of the day.”
“US Exim has sought
to systematize its ability to understand and evaluate customer needs
by establishing a new functional area within the bank focused
exclusively on customer experience. This function is providing a
mechanism for US Exim to comprehensively assess the needs of its bank
partners (and other customers) and evaluate program, product or
progress changes to better serve their needs and ultimately to
maximize the volume of support provided to exporters.”
“We understand that
holding long-term, ECA-backed assets may become less attractive to
banks, but the asset is a good fit for the capital [bond] market.”
“ECAs play an
important role in letting products and services compete on a global
market.”
“Awareness of credit
insurance is still below the optimum level in Asia.”
“The atmosphere
[among Prague Club members] is very informal and there is a free
exchange of information. The members are not in competition with each
other, so there is much room for sharing and helping each other.”
“The third round of
the Basel accords will continue to limit the ability of banks to
provide trade finance to benefit importers and exporters.”
“Insurance companies
are slowly starting to use their liquidity to invest in trade finance
instruments as a new area of business.”
Resource: