Dutch Government to resolve Indonesia cover through credit default swaps

(Both ENDS, Amsterdam, 28 August 2007) The Dutch government is facing sustained problems in managing its export credit risk exposure on Indonesia. The main reason is that in recent years cover has been provided for the export of military navy vessels to Indonesia for a value of more than €1 billion. The cover ceiling for Dutch export credit support to Indonesia is only €1.5 billion. Because of this, many regular Dutch exporters find it hard to get ECA cover for their exports to Indonesia.

To ease the situation, and open up room to cover additional exports, the Dutch government in 2006 concluded an exposure swap with EKF of Denmark for €50 million. In the same year, a similar deal was also concluded with ONDD of Belgium for €75 million. Finally, a reinsurance deal was struck with Zurich's Emerging Market Solutions for a total value of €110 million. Thus additional ECA cover for a total value of nearly €250 million was enabled for Dutch exporters to Indonesia.

However, this hardly meets the demand from Dutch exporters. Therefore the Dutch Ministry of Finance has been exploring other options in the market to reinsure the export credit exposure of the Dutch State on Indonesia. In late August it was announced that this is possible via so-called credit default swaps (CDS's).

Press Release Netherlands Ministry of Finance; 23-08-2007 (translation Both ENDS)

The Ministry of Finance investigated whether part of the country risk that the Dutch State is exposed to in Indonesia can obtain cover in the market. This country risk is related to the export credit insurance facility of the Dutch State. The investigation was amongst others focused on the status of the loans that have been covered by export credit agencies (ECA-loans) and at the role of the Paris Club. Banks, legal advisors and other ECAs have been involved in this research.

From the research, it emerges that it can be attractive for the Dutch State to cover these country risks in the market. Therefore the Ministry of Finance has the intention to cover part of this country risk by Credit Default Swaps (CDS's). The objective is to create in this way more space under the country ceiling for Indonesia and thus to be able to facilitate further exports.

Initially this will be a pilot-transaction. This transaction will determine whether the instrument will be used more in future.