An export credit agency (ECA) is a public agency, or a private company acting under a government mandate, that supports a country's exports by insuring, guaranteeing or directly financing sales to foreign buyers. ECAs take on risks that commercial banks and insurers find too long, too large or too exposed to political events, such as a 10-year loan for a power plant in a frontier market.
Most ECAs offer some mix of export credit insurance, guarantees to banks, and loans. Their support is governed internationally by the OECD Arrangement on Officially Supported Export Credits, which limits the terms that participating governments can offer so that they compete on price and quality rather than on subsidy. ECAs work alongside, and sometimes compete with, development banks and private trade credit insurance companies.
Export credit agency in plain terms
Picture a small hometown builder who wins a contract to build a school in a distant country. The local bank likes the builder but does not know the foreign customer and worries that a change of government could stop the payments. So the town council steps in and says: "If the customer fails to pay for reasons outside your control, we will cover most of the loss."
An export credit agency is that council, working for a whole country. With its backing, the bank is willing to lend and the builder can offer the customer time to pay. The government does this because exports create jobs at home, and because other countries' builders have the same kind of backing. The agency charges a fee, so the support is closer to insurance than to a gift.
History
The United Kingdom set up the first ECA in 1919, the body later named the Export Credits Guarantee Department and now called UK Export Finance. The Export-Import Bank of the United States followed in 1934, the same year that insurers from several European countries founded the Berne Union, now the main international association of export credit and investment insurers. After 1945, ECAs became central to financing exports of capital goods such as aircraft, ships and power equipment. Fear of a subsidy race led OECD members to agree the Arrangement, which took effect in April 1978 and is revised regularly.
What ECAs provide
- Insurance. Cover for an exporter against non-payment by a foreign buyer for commercial or political reasons, often used to back supplier credit.
- Guarantees to lenders. A promise to repay a bank that lends to a foreign buyer, which turns a hard credit into near-sovereign risk and makes buyer credit possible.
- Direct lending. Some ECAs, such as export-import banks, lend themselves, often at fixed rates.
- Working capital support. Guarantees on loans that fund production before shipment, a form of pre-shipment finance.
- Investment and bond cover. Insurance for overseas investments against expropriation or war, and cover for contract bonds such as an advance payment guarantee.
Two models exist. "Pure cover" ECAs only insure or guarantee, leaving banks to fund the loan; others both lend and insure. Some countries run separate bodies for each, for example Japan's NEXI (insurance) and JBIC (lending).
The OECD Arrangement
The Arrangement is a "gentlemen's agreement" among a group of OECD members rather than a treaty. For medium- and long-term support it sets minimum premium rates based on country and buyer risk, maximum repayment terms, rules on repayment profiles, and a minimum down payment by the buyer (traditionally 15% of the contract value; since 2021 participants have at times agreed temporary rules letting it fall to 5% for certain public buyers in poorer countries). Fixed-rate official lending must charge at least the Commercial Interest Reference Rate (CIRR) for the currency. Sector understandings cover areas such as aircraft, ships, nuclear power and renewable energy. China, now one of the largest providers of official export credit, is not a participant, which limits the Arrangement's reach. ECAs also apply environmental and social due diligence and anti-bribery checks, and they price country risk using OECD country risk classifications, which feed into the risk premium charged.
Examples and criticism
Well-known ECAs include UK Export Finance, the Export-Import Bank of the United States, Bpifrance Assurance Export in France, Euler Hermes (part of the Allianz Trade group) acting for the German government, Japan's NEXI and JBIC, Korea's K-SURE and KEXIM, the Export-Import Bank of China and Sinosure, and India's ECGC and Export-Import Bank of India.
Critics argue that ECAs subsidise large companies, crowd out private underwriting, and have financed fossil-fuel and other projects with heavy environmental costs; in 2021 Arrangement participants agreed to end official support for unabated coal-fired power plants. Others point to debt problems when ECA-backed loans to weak governments end in sovereign default and restructuring through the Paris Club. Supporters reply that ECAs fill a genuine market gap, especially for long tenors and for small and medium-sized enterprises, and that they usually break even over time. ECA lending is also affected by Basel III, because an ECA guarantee lets banks hold less capital against the loan.