ECAs jointly offer the largest public source of official funding for developed countries' guarantees, insurance and direct loans to commercial transactions tacking place in developing countries. As such, ECAs are the largest source of developing country bilateral external debt.
Industrialised countries' ECAs support domestic companies doing business abroad by offering them export credits (loans), guarantees of export credit insurances. ECAs aim to support domestic companies, i.e. they do not have a development mandate. In case an ECA supported transaction defaults, ECAs assume the financial risks involved, thus substantially contributing to bilateral debt claims held against many developing countries.
The problem with debt
Debt remains a persistent obstacle for the economic development of many countries, particularly in the global South. Access to credit and finance is considered an essential precondition for any kind of development. However the borrowing of money does cost money, especially in cases where such loans are not performing well. In a situation of declining levels of aid, the economies of many developing countries continue to depend on finance from abroad, both from the private and the public sector. In the first decade of this century large amounts of such debts have been restructured and occasionally cancelled. The ensuing financial crises however once again have made many developing countries vulnerable to insufficiently controlled inflows of private capital including officially supported export credits.
ECAs and debt
In providing guarantees, insurances and direct loans to commercial transactions in developing countries ECAs jointly constitute the largest public source of funding. In case such transactions default, ECAs also become the largest source of developing country external debt. Unfortunately reliable and complete figures of the external debt of many countries are hard to come by. Old data indicate that more than half of all official external bilateral debt of developing countries originates from ECA supported transactions. A Eurodad study in the end of 2011 assessed that almost 80 percent of poor countries’ debts to other governments came from export credits, not development loans.
In 2008 the members of the Working Party on Export Credits and Credit Guarantees of the OECD (called the OECD ECG)adopted a set of Principles and Guidelines to Promote Sustainable Lending Practices in the Provision of Official Export Credits to Low Income Countries.
The ECAs largely lean on the Debt Sustainability Framework (DSF) developed by the IMF and the World Bank. The framework demands a commitment to refrain from providing support to unproductive expenditures. However, unproductive expenditures are not well defined in this context. ECAs often fund transactions that actually have negative development impacts. Environmental damages, human rights violations, or the loss of livelihoods of local communities due to ECA-supported transactions inevitably result in additional costs, seriously exacerbating debt burdens.
Conflict of interest
All ECAs have debt collection departments with the primary purpose of recovering arrears and debts. Virtually no official reporting is available on the activities of such departments. Official negotiations on the restructuring of bilateral debts take place on a country-by-country basis in the so-called Paris Club of creditors. The ECAs of the 19 member states of this informal club of creditor nations usually sit in on such negotiations. Thus there is little room for a process in which the interests of an indebted country are fairly balanced against the interests of creditor nations.
While the ECAs are the main engines generating public bilateral debt, they also play a central role as referees in the only bilateral debt settlement mechanism the world so far uses. This obvious conflict of interest is very illustrative of the powerful position that ECAs remain to have in the global economy.
In cases where creditors do agree to restructure export credit debt, usually part of the debt is written off as Official Development Assistance (ODA) expenses, which is allowed under reporting rules of the OECD-DAC. Such debt cancellation tends to be applied to the full nominal amounts - i.e. the original stock plus all accrued interest, arrears and fines - rather than the actually much lower market value of the same debt. This raises fundamental questions about the financial consistency of ECAs. ECAs are required to cover all their costs and expenses – including debt write-offs – from the revenue they generate from their clients through premiums and interest payments, so there seems no reasonable argument for reporting debt write-offs as ODA expenditures. In countries where ODA budgets are fixed as a specific part of the GDP this practice actually results in less money being available for regular development cooperation efforts.
Dodgy deals and debt
Export Credit Agencies (ECAs) usually do not disclose information on specific transactions that defaulted and thus incurred debt claims. Due to the secrecy of ECAs on this topic, the causes of a large part of bilateral debt claims remain shrouded. A good study illustrative of the nature of relevant problematic deals is: The Department for Dodgy Deals, Jubilee Debt Campaign, London, 2011.
What is ECA watch doing
ECA-Watch is closely collaborating with the European Network on Debt and Development (Eurodad) on monitoring developments on export credit debt. The lack of transparency of most ECAs remains the largest obstacle to an effective approach on this issue.