Abstract

At the onset of the debt difficulties in 1982, most export credit authorities applied their traditional principles guiding cover policies, which had been developed over many years to deal with country-specific and isolated debt problems. Medium- and long-term cover was suspended for a large number of debtor countries that rescheduled debts, although short-term cover was generally retained if the debtor country was current on such obligations. Most export credit agencies also began to emphasize more rigorous countryrisk assessment procedures and employed more frequently quantitative instruments to help limit country exposures, such as country ceilings or limits on the size of individual transactions. One agency reported, for example, that the number of countries for which it imposed overall limits had been increased from 10 to 80 over the past few years. Also, in 1982-84, all ten agencies made upward adjustments in the premium rate structure in order to cope with the financial strains of claims payments relating to debt reschedulings and arrears. In many cases, the premium structure has become considerably steeper to reflect country-risk differentials, and at times substantial surcharges have been introduced on a case-by-case basis for high-risk countries.

At the onset of the debt difficulties in 1982, most export credit authorities applied their traditional principles guiding cover policies, which had been developed over many years to deal with country-specific and isolated debt problems. Medium- and long-term cover was suspended for a large number of debtor countries that rescheduled debts, although short-term cover was generally retained if the debtor country was current on such obligations. Most export credit agencies also began to emphasize more rigorous countryrisk assessment procedures and employed more frequently quantitative instruments to help limit country exposures, such as country ceilings or limits on the size of individual transactions. One agency reported, for example, that the number of countries for which it imposed overall limits had been increased from 10 to 80 over the past few years. Also, in 1982-84, all ten agencies made upward adjustments in the premium rate structure in order to cope with the financial strains of claims payments relating to debt reschedulings and arrears. In many cases, the premium structure has become considerably steeper to reflect country-risk differentials, and at times substantial surcharges have been introduced on a case-by-case basis for high-risk countries.

After this initial phase, the export credit authorities began increasingly to adapt practices to the changed environment of widespread debt difficulties. In so doing, they have attached importance to an orderly and timely resumption of normal cover for countries which have rescheduled debt and implemented adequate adjustment policies.16 By early 1984, agencies were already beginning to broaden the scope and increase the options for retaining cover for some rescheduling countries, and exceptional export credit arrangements had been made on a case-by-case basis for certain debtor countries to promote systemic stability and to strengthen adjustment efforts.

Over the past year and a half, policies and practices appear to have been adapted further in several important respects, and creditor authorities have shown increased willingness to retain or resume cover for countries that are implementing adequate adjustment programs. Certain long-standing rules have been modified, and cover policies have more frequently been tailored to fit the distinct economic circumstances of the debtor country in question. This section documents the main changes in policies and practices that have been introduced recently, including agency financial developments, cover policies in the debt buildup phase, the recent tendency for an earlier resumption of cover, and the impact on cover policies of the increasingly differentiated terms of debt reschedulings provided under the Paris Club.

Export Credit Agency Finances and Operations

Following the emergence of widespread debt difficulties in 1982, the export credit agencies have faced a dramatic deterioration in their financial position as a consequence of a record level of claims payments caused by the debt reschedulings and arrears of an unprecedented number of debtor countries.17 In the last year and a half, most agencies were still under strong financial pressures, and cash deficits on export credit transactions have continued to rise, reflecting substantial claim payouts and a slow growth or even a decline in premium incomes. Most agencies’ recoveries of claims have been increasing, but claim payouts still exceed by large margins the sum of recoveries and premium incomes. In spite of the large increases in premium rates during 1982-84, total premium receipts have been depressed, owing to the decline in business volume. Only one agency was able to report a slight improvement in its financial position in 1985, while another agency indicated that a provisioning exercise which had recently been completed pointed to the first hopeful signs in four to five years.

Most authorities indicated that while the agencies’ financial conditions remained difficult, the worst may be over, with the financial results in the near future either improving slightly or at least deteriorating no further. It may be noted in this connection that while the cash flow position is crucial from the perspective of the individual agency (especially those without ready recourse to refinancing of the rescheduled claims), an assessment of the financial position of agencies must also take account of future recoveries of rescheduled claims. Moreover, from the viewpoint of the creditor government, cover policy decisions need to be based on even broader considerations.

There have been relatively few changes in premium rates since the major upward adjustments in the premium structures of 1982-84. Most agencies reported no significant change since then in the general premium structure. One agency that had raised premium rates steeply in 1982 was able in July 1985 to reduce somewhat the rates and the progressivity of their structure.18 Only one of the agencies indicated that the premium rates were raised sharply. That agency increased rates by an average of 25 percent in January 1985, with individual increases ranging from 15 percent to 44 percent.19 For most other agencies, certain selective adjustments in premium rates have been introduced. For example, rates have been increased for those markets with a higher degree of political risk or for comprehensive short-term policies with weak private buyers’ claims records.

A few agencies continued to experiment with risk-sharing arrangements as an alternative to refusing an entire transaction or limiting its size. However, such experimentation has been confined to very few arrangements with banks, private insurers, and, in one instance, between two national agencies.20 Risk-sharing with private insurers has not proved very successful because the private insurers were much less able to share in the political risks, given their marginal involvement so far in this insurance field, and they have tended, therefore, to be cautious, requiring very high premiums. Nonetheless, from the limited experience so far, some agencies believe that risk-sharing could be a productive way of gearing up new commercial credit flows without increasing their exposure as much as would otherwise be the case. Such sharing of risks would be consistent with the current interest of governments to complement financing efforts by banks and other creditors. Most agencies continued the traditional practice of sharing certain risks with the national governments, either directly through specified government accounts, referred to as national interest accounts, or indirectly through the bilateral assistance authorities.

Finally, with a view to improving their financial position, most agencies are adopting a more active policy of debt recovery through, for instance, more active negotiations with private firms in the debtor countries. In some agencies, an effort is under way to reduce the level of portfolio risk by instituting whole-turnover policies where these had not previously existed, thereby requiring participating exporters to insure across a broader range of transactions and countries.21 For others, outstanding cover offers, which in the past had been committed automatically if the commercial contract was obtained, would now be scrutinized more carefully, and offers now have a fixed life, such as six months, which could be extended for a further fixed period, such as three months, but sometimes only with an additional fee.

Cover Policies in the Debt Buildup Phase

For convenience, current policy issues may be discussed along the lines of the three distinct phases of debt situations: the debt buildup phase, the debtservicing difficulty and rescheduling phase, and the recovery phase. It is, of course, not regarded as normal or inevitable that borrowing countries pass beyond what is termed the debt buildup phase. Policy interest relating to the debt buildup phase is mainly precautionary and concerns primarily the ways to avoid debt-servicing difficulties.

Cover policies and practices for the debt buildup phase have undergone relatively fewer changes than for the rescheduling phase and the recovery phase. There is general recognition among the export credit authorities that there are built-in tendencies for the export credit agencies as a group, though not necessarily for each agency, to remain on cover too long for countries that, while not in immediate difficulties, are pursuing policies that could contribute to future debt-servicing problems. This systemic weakness continues today and tends to postpone adjustment efforts in some borrowing countries beyond the time when adjustment measures would entail a comparatively light effort.

The export credit authorities stress that it is the borrowing country’s responsibility to exercise prudence. Discipline on the lender’s side is complicated by the fact that advance warning signals or leading economic indicators are rarely fully conclusive. Given this fact, in an intensely competitive export environment, it is difficult for any single agency to attempt to tighten cover policy ahead of other agencies. Furthermore, there is the perception that an individual agency’s action would affect only marginally the overall outcome and that there is a need for agencies as a group to proceed gradually rather than abruptly to avoid precipitating a liquidity crisis for the borrower.

In light of recent experience, efforts have been made to strengthen procedures for assessing country risks. Greater emphasis is being placed on leading indicators, such as the direction of economic policies in a borrowing country and the medium-term payments and external debt outlook. While efforts are also under way in some agencies to strengthen project appraisal, further improvements are possible, as discussed in Section IV. Aside from these steps within each agency which help to improve risk assessment, there remains an interest in exploring collaborative steps on a case-by-case basis to develop sounder lending standards. While it is acknowledged that significant progress in this area would be in the interest of both the agencies and the debtor countries, it is also recognized that consistent and effective preventive policies in this regard will be difficult and will take time to evolve, given the export promotion objective of the export credit system and the resulting competition.

Concerning risk assessment in particular, recent debt difficulties have underscored the importance of more forward-looking and more comprehensive procedures. Most authorities report that borrowing countries are kept under more frequent review than in the past. Efforts to improve risk-assessment techniques are continuing through the development of better forecasting methods and, in one agency, a methodology for inter-country comparisons. Country analysis has become more forward-looking and uses information from various outside sources. It was hoped that the improvement in country-risk analysis would help to promote a greater synchronization of cover policies with adjustment efforts of debtor countries both in the debt buildup phase and in the recovery phase. Some authorities also indicated greater attempts to resist various political pressures and to avoid the granting of exceptions on political grounds to country policy criteria and limitations that have been set on the basis of economic creditworthiness analysis. However, agencies continue to cite competitive pressures as making it difficult in practice to deny credits and cover merely on the strength of unfavorable risk assessments, as opposed to actual payments difficulties. In one major agency, the main policy thrust over the last year has been to seek greater clarity in policy formulation and more consistency between its risk assessment and the application of its cover policies; policy application was also being more finely tuned through a greater use of discretion and delegating authority for banks and exporters and of transaction limits.

Earlier Resumption of Cover in the Debt Rescheduling Phase

Concerning the rescheduling and recovery phases, a major recent development in policies and practices has been the tendency, in the case of countries that are successfully implementing adjustment policies, for export credit authorities to modify the traditional rules governing the resumption of export credit cover. At least one half of the agencies reported that they were following practices that would permit an earlier resumption of cover for medium- and long-term credits, generally after the conclusion of the Paris Club bilateral agreement.22 Other agencies indicated that they hoped to find themselves in a position to reopen such cover after Paris Club bilateral agreements had been signed. In three agencies, new programs have been established to allow early cover resumption for selected rescheduling countries that are taking effective action to deal with their economic problems. These developments mark a major break from past practices where medium- and long-term cover would not be resumed until, in some cases, two or three years after the debt rescheduling. Under the more recent practice, the period of cover interruption for selected countries would be much shorter, perhaps less than a year.

Under this recent approach, the authorities concerned are applying cover policies more flexibly, and they are attempting to make finer distinctions, based on criteria described below, among debtor countries that have rescheduled debt to official creditors. In resuming cover for selected rescheduling countries, the authorities thus attempt to minimize the associated risks and avoid any adverse consequences on the agencies’ own finances or the national budget. This approach has the effect of reducing the number of countries facing a suspension in medium- and long-term cover.

While the detailed procedures differ across countries and agencies, the basic features of this recent practice are that cover would be resumed after the rescheduling countries have concluded and are implementing their Paris Club bilateral agreements, and if they remain in compliance with a Fund-supported adjustment program. Cover would normally be resumed for exports that contribute directly to the debtor country’s economic recovery, e.g., for essential inputs and carefully selected projects with clear linkages to the country’s foreign exchange earning capacity. Medium-term cover would be made available up to a limit, provided the country has no current transfer delays and the medium-term balance of payments outlook can be regarded as sustainable. The new programs generally involve annual limits on exposure which are normally below expected exporter demand for cover. For all agencies, an essential precondition is that the country involved did not seek a change in the cutoff date 23 under its Paris Club rescheduling agreement. Early resumption of medium- and long-term cover under programs of this type has applied to countries such as Ecuador, Côte d’Ivoire, Malawi, and Mexico. For Ecuador, three agencies resumed cover even before the bilateral agreement was signed.

In two agencies, new guidelines were introduced whereby cover could be suspended on only a temporary basis, pending the completion of the Paris Club bilateral agreement. One objective was to encourage a speedy completion of the bilateral negotiations. In the interim period when cover is temporarily suspended, discussions with the borrowing country could continue on prospective trade and project transactions, and offers could be made on these transactions contingent upon the completion of the bilateral agreement. This type of procedure helps to ensure that interruption of cover is kept to a minimum. Furthermore, exception for an even earlier resumption of cover could be made on a case-by-case basis; e.g., cover could be provided for projects that were approved by the World Bank even if the bilateral agreement had not yet been signed.

The tendency for an earlier resumption of cover for certain rescheduling countries has been motivated by the following considerations. First, the early resumption of cover helps support debtor countries undertaking adjustment. In these cases, increased flexibility was seen as permitting a feasible balance between the need to promote exports and the need to restrain risks. Second, certain changes had to be introduced in response to competitive pressures and in order to preserve market shares; exporters in creditor countries where cover policies were relatively tight have lost competitiveness, making it more difficult for the agencies involved to justify tight policies. Third, certain changes could be accommodated through increases in premiums and surcharges to match the higher risk and, as noted earlier, the permitted increase in exposure was limited. Fourth, the changes are geared to speed up the bilateral negotiations and impart a stabilizing element to the rescheduling process.

The export credit authorities continued to stress the following factors that could facilitate an early resumption of cover for rescheduling countries. Without exception, all authorities attached great importance to the debtor country’s not changing the cutoff date where successive Paris Club reschedulings were likely to be needed.24 This was seen as particularly important in providing a measure of confidence for the granting of medium-term credits and would significantly influence the attitude of export credit agencies. Some agencies stressed that only by maintaining the cutoff date and protecting new credits from rescheduling could it be possible to restore normal debtor/creditor relations. They concluded, therefore, that this principle should be maintained, even if that required repeated reschedulings of service on debt originally contracted before the cutoff date.

Aside from this primary factor, most authorities also considered crucial a prompt conclusion of the bilateral agreements, especially for agencies where there is a policy of resuming cover only after the completion of such agreements. A few agencies also indicated that if successive reschedulings were needed, it would be best to avoid requesting rescheduling terms that were worse for the creditor than under the previous rescheduling, or terms that were exceptional by Paris Club standards. Some small improvement from year to year in successive reschedulings would give the impression of progress being achieved; this could be reflected in a request for reduced rescheduling percentages or a progressively narrower scope of the rescheduling. Such an approach might facilitate the phased resumption of new credits and cover. Exceptional rescheduling terms, on the other hand, were considered as applicable to very serious cases of payments difficulties which would call for an off-cover policy for new credits. Most authorities continued to stress the importance of debtor countries’ maintaining dialogue and close communication with the agencies to review prospects and attitudes.

Differentiation in Paris Club Terms and New Export Credits and Cover

For the rescheduling and recovery phases, most export credit authorities view the increased differentiation in terms being agreed at Paris Club debt reschedulings as a positive development and as having a considerable influence on export credits and cover. In the past, a close linkage between debt rescheduling and new export credits and cover policies had been defined largely in the context of short-term debt only, but this linkage has more recently been broadened to apply to other aspects of debt rescheduling. By early 1984, export credit authorities had stressed the importance of the exclusion of short-term debt from rescheduling and the debtor country had been encouraged to remain current on such debt since such exclusion from rescheduling would permit the maintenance of crucial short-term trade credits. Over the last year and a half, as debt reschedulings have been tailored increasingly to meet the individual circumstances of the debtor countries, cover policies have been adapted correspondingly. Three notable developments in this context concern cover policy adaptation in situations of multiyear rescheduling, exclusion of private sector debt from debt rescheduling, and exclusion of interest from rescheduling. Experience to date would indicate that, in appropriate cases, such carefully tailored reschedulings can facilitate the maintenance or resumption of export cover.

Cover Policies in the Context of Multiyear Restructuring Agreements

So far, there has been one official multiyear restructuring agreement (MYRA) within the framework of the Paris Club. This agreement was concluded with Ecuador in April 1985. In agreeing to the MYRA with Ecuador, official creditors attached importance to the fact that Ecuador’s external position was expected to be sufficiently strong to enable it to finance the current account of its balance of payments without further concerted action by creditors and without rescheduling of interest. In view of the objective that a MYRA should provide a transition to normal debtor/creditor relationships, official creditors also considered it important that the percentage rescheduled decline over time. The agreement, therefore, provided for the rescheduling of principal only, with the percentage rescheduled declining from 100 percent in 1985 to 85 percent in 1986 and to 70 percent in 1987.

The MYRA for Ecuador was viewed as representing the exit phase of payments difficulties for the country and was considered a vote of confidence from the creditors for the economic policies and the financial prospects of the country. Accordingly, in this instance, three major agencies retained cover for Ecuador after the multilateral restructuring agreement, even before the conclusion of the bilateral agreements. In one major agency where medium- and long-term cover was suspended, this was partly in line with its standard policy of suspending such cover for the duration of the consolidation period of the rescheduling. The authorities indicated, however, that their policy in this regard was under review as they explored the possibility of differentiating cover policies for countries that have undertaken successful adjustment and are reestablishing creditworthiness. In particular, the authorities were examining whether there could be any change in the present policy of resuming cover only after the end of the consolidation period. One other major agency was predisposed to resume cover, but cover had been suspended because of outstanding arrears which were mainly administrative. In some of the smaller agencies where cover was temporarily suspended, it was in part as a response to temporary arrears that were due to administrative delays; it was noted, however, that demand for cover and credits from these agencies had been rather sluggish.

The general policy stance of most major agencies in this case represents a significant departure from past practice, especially for those agencies that had hitherto adhered firmly to the rule of suspending cover during the consolidation period of the debt rescheduling. This change in policy is consistent with the desire of creditor government authorities to provide MYRAs, under appropriate conditions, as a means of facilitating a return to normal market access. It was noted in this connection that one of the advantages of the MYRA is that the cutoff date is fixed for an extended future period, thus providing greater assurance that new export credits will not be rescheduled. In practice, for certain agencies, it would in fact be difficult to distinguish the cover policy stance for countries with MYRAs as against those with serial debt reschedulings that result in a similar financial outcome and where there is confidence that the cutoff date will not be changed.

Exclusion of Private Debt from Rescheduling

Until recently, Paris Club debt reschedulings had normally covered the debt both of the public sector and of the private sector in the debtor countries. The only exception to this practice was that the private debt was generally excluded for countries in a currency union where the problem of foreign exchange transfer would not be relevant. More recently, private sector debt has been excluded from the rescheduling agreements for Chile, and subsequently also for Jamaica and Morocco. Most export credit authorities indicated that they would be willing to stay on cover for the private sector if such debt has not been rescheduled and has been serviced on a current basis, because any new private debt would likely be serviced on a timely basis, in part reflecting the less severe liquidity situation. At least one major agency has a firmly established principle to resume cover for debt that has not been rescheduled, although most agencies have no fixed rules for retaining cover for the sector that avoids debt rescheduling. In Chile, because the debt rescheduling agreement was structured to exclude the private sector debt and Chile had been current on such obligations, most of the major agencies were willing to remain on cover for the private sector in spite of the rescheduling of public sector debt.

On operational grounds, the exclusion of private sector debt from a rescheduling can simplify considerably the rescheduling process since technical complications have often been encountered in rescheduling such debt. In particular, it is often difficult in practice to identify the eligible private sector debt and to draw the line between commercial default, which is not covered by Paris Club reschedulings, and sovereign risk. Also, the maintenance of credits and cover to the private sector is consistent with the high priority attached to promoting the private sector in debtor countries as part of the recovery process. On the other hand, the issue could be more complicated if the private sector debt service is relatively large compared with the country’s total financing need, or where there are important issues of intercreditor equity and burden-sharing. Also, a few agencies do not make an operational distinction between public and private sector debt, noting that excluding such debt from the rescheduling is not a sufficient assurance that the private sector would in the future be in a position to transfer abroad the service on its obligations. Furthermore, for a debtor country with severe payments difficulties and in need of major economic adjustment, the private sector is likely to be temporarily and adversely affected during the adjustment period and the commercial risks of any new transactions can be significantly worsened, even in the absence of transfer risks. On balance, creditors prefer to have these issues addressed on a case-by-case basis. They are reluctant to set firm rules regarding either the exclusion of private sector debt from reschedulings or the impact of such an exclusion on their policy with respect to new export credits.

Exclusion of Interest from Debt Rescheduling

In assessing creditworthiness, most export credit authorities consider the exclusion of interest from a debt rescheduling request as a positive sign as well as an indication of a relatively mild degree of financial difficulties. Importantly, such a limited rescheduling increases confidence that the country would not in the future need to seek a change in the cutoff date, even if its external situation deteriorated somewhat. Most export credit authorities also view the avoidance of interest rescheduling very positively in the sense that the payment of interest by the debtor country is considered proof of its desire to maintain, to the extent possible, a normal payments relationship.

Cover Policies for Countries in Protracted Payments Difficulties

Cover policies remain very restrictive for those countries that are facing severe and protracted payments difficulties, and the agencies would generally be off cover, either formally or effectively. However, most authorities indicated that, even where they are off cover, they may continue to provide special export credit assistance and selective cover on a case-by-case basis. For instance, cover could be provided to complete ongoing projects, to assure essential inputs for the production of exports, and for projects in which the World Bank or regional development banks are involved. Cover could also be provided for essential imports financed under government lines of credit, or for preshipment risks on projects that are aid-financed. Periodically, other unique transactions could be accommodated on a limited scale and on a selective basis. Such medium-term cover would be provided on the national or state account.25 Ad hoc arrangements may be made for other short-term cover. For example, short-term lines of credit for raw materials and spare parts may be kept open to permit the uninterrupted operation of existing investment projects, although with additional restrictive conditions (such as central bank guarantees or confirmed irrevocable letters of credit) to ensure priority of repayments.

For countries in protracted payments difficulties, however, there seems to be little scope for further additional export credit assistance. Official creditors have already exercised considerable flexibility for these countries by effectively rescheduling close to 100 percent of both principal and interest falling due. It was also recognized that in many of these instances, given the magnitude of the problems, successive debt reschedulings at exceptional terms may well be necessary. Furthermore, such exceptional efforts would need to be complemented by additional financial assistance on appropriate concessional terms. Additional officially supported commercial credits would not be the appropriate vehicle for such assistance where there is no realistic prospect of the country having the capacity to service such new commercial financing and where, therefore, such financing flows could not be sustained. Any additional assistance to such countries in support of their adjustment efforts would need to take the form of new bilateral or multilateral aid flows.