Dutch Government resolves Indonesia cover through credit default swaps

(ECA Watch, 29 August 2008) Because of Atradius DSB cover for the export of military navy vessels to Indonesia with a value of about €1 billion some years ago, [the legal cover ceiling for Dutch export credit support to Indonesia is only €1.5 billion] many regular Dutch exporters have found it hard to get ECA cover for their exports to Indonesia. The Dutch Government has developed hedging mechanisms to pass the risk off to third parties, allowing increased Dutch exports to Indonesia to receive export credit subsidies. Following last year's pilot of €60 million, additional credit default swaps for an amount of €150 million have been announced. Pilot exposure swaps were earlier conducted with EKF, the Danish ECA and the Dutch State also entered into a number of reinsurance agreements with other parties for part of their exposure on Indonesia. The Dutch Ministry of Finance did not disclose information on which banks they signed contracts with.

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The Dutch State announces cover for country risks on Indonesia
news release ¦ 07-08-2008 ¦ Central Information Directorate

The Ministry of Finance has hedged € 150 million of the country risks of the Netherlands has in Indonesia through credit default swaps (CDS's). This is the first tranche of transactions after the succesfully pilot of last year [2007], [in which € 60 million was covered. In total the Netherlands State now has covered € 210 million of the country risks on Indonesia through CDS's. These CDS's have been concluded with banks.]

The country risk exposure is related to the export credit insurance facility (ECI facility) of the Netherlands. With the successful completion of these transactions, the Ministry of Finance has an additional instrument available to manage country risks. These CDS transactions have lowered the country risk exposure under the country risk ceiling, so that the Netherlands is able to facilitate additional Dutch exports [to Indonesia].

In order to hedge these specific country risks, the standard CDS contract has been adjusted such that the loans backed by export credit agencies (ECA-loans) are covered by the contract. The Netherlands has been able to execute these adjusted CDSs [in a] cost-effective [manner] as the costs of these CDSs are covered at a minimum [at least] by the ECA-premium. This is the premium the Netherlands received for the country risk exposure in the past.

Foreign ECAs have also shown interest in this CDS tailored to ECAs. If other ECAs also decide to use this instrument, it will contribute to the further development of this specific CDS market segment. It will enhance the liquidity of these adjusted CDSs with possible cost reductions as a result.

Background information

Country risks are credit risks the Netherlands runs in other countries, for instance by financing export transactions. The Netherlands reinsures large payments risks that cannot be insured privately in order to facilitate the Dutch export to, in particular, upcoming markets, the Middle East and developing countries. The reinsurance of these payment risks is effected by way of the Export Credit Insurance (ECI) facility of the Netherlands.

A Credit Default Swap (CDS) is an agreement between two parties in which the credit risk of a third party is transferred.