Hello from Budapest. We are fortunate enough to be writing these words from one of the city’s fancier hotels, located right next to the Danube. Gazing out of the window, we could not help but notice the lack of the tourist cruisers that once used to dot the river.
We sorely miss them. The first three waves of coronavirus infections are already behind us, but with a fourth one ramping up, tourism is still a shadow of its former self and business travel is skeletal. It is a similar story across much of the world right now.
One part of the economy that is doing rather better, however, is trade. The reasons for the export revival that has been in train since the latter half of 2020 are many, but one that has not received much attention is the actions of export credit agencies.
For today’s main piece we interviewed the head of the Berne Union, an association of export credit agencies, to find out how it is helping exporters arm themselves against the downsides of the pandemic through export credit and insurance.
The hidden helping hand of export credit agencies
If you have never heard of the Berne Union, do not be too harsh on yourself. The association might serve a confluence of governments, exporters and importers, private and public lenders, and insurers, but the field in which it operates — export credit — remains largely obscure to all those not directly involved with it.
But, as people interested in trade, we really think you ought to know more. One reason is that the Berne Union operates all over the world. And by all over, we mean everywhere — countries such as the US and China or Iran and Israel can discuss trade issues freely at the Berne Union conferences, with even political considerations mostly taking a back seat.
It was that environment of co-operation that helped ensure exporters did not go out of business permanently when coronavirus effectively shut down cross-border movement during the spring of 2020.
There are two main sorts of support export credit agencies (ECAs) provide. Credit insurance protects exporters against client non-payment due to political or commercial risks, while investment insurance protects against losses to cross-border investments from political risks.
Over the course of the pandemic, members of the Berne Union provided $2.5tn in cover, its president Michal Ron told Trade Secrets. All in all, the volume of business supported by members rose 2.4 per cent between 2019 and 2020.
Of course, that is the nature of this business — periods of economic uncertainty such as those we find ourselves in require more backstops. Especially when undertaking risky endeavours such as sourcing goods from the other side of the world. But there is a feeling that the industry has learnt its lessons since the 2008 financial crisis, when world trade collapsed.
Although the coronavirus crisis was not a financial one at root, it had a huge impact on both the financial sector and finance in general. As the initial lockdowns and closed borders made trade impossible, disruptions could have easily escalated into a domino effect — and pressure tends to find weak points in the supply chain, easily forming a credit and liquidity crisis.
As governments and industries looked to ECAs to fill in the gap, the notable differences from 2008 became apparent. ECAs, enabled by digitalisation, were able to move fast.
The role of ECAs expanded as governments took steps to ensure liquidity in their domestic markets, accelerating a trend already started before the pandemic. “In these situations there is no requirement for a link to any specific export transaction,” Ron told us. “Domestic products of ECAs increased by half during 2020 for a total of $78bn. That’s a quite significant sum”.
ECAs were also nimble and often saw red lights first. They initiated help for hard-hit sectors — such as tourism, aviation, and industries affected by the halting of trade, notably oil, gas and other extraction-based industries — before governments made any moves, helping to save companies and jobs. European ECAs developed a standard way to restructure aircraft debt as air travel ground to a halt and several airlines fought insolvency. Airbus — whose exposure was covered by UK Export Finance, Euler Hermes in Germany and Bpifrance — was one beneficiary.
The reaction has been similar the world over. “We have not heard of any major or even minor ECA that reduced its risk appetite — on the contrary,” Ron said. “ECAs have stepped up to support not only national exports but also private sector finance. We have not seen any specific capacity constraints in this.”
There is optimism that the industry has helped stem a cyclical decline, despite the lingering effects of the pandemic.
Longer term, Ron believes the pandemic has rewritten the DNA of global trade — security will be considered far more important than before. In that sort of environment hybrid players such as ECAs have a lot of room for growth.
“We have ECAs that are government agencies directly under a ministry,” she said. “Others are joint stock companies with a government-based shareholder. Some simply use direct government funding — it depends. We are very heterogeneous.”
In an era defined by escalating conflicts over trade, these hybrid models can take the conversation out of the well-worn (and somewhat dysfunctional) channels and enable dialogue among partners that are unlikely to otherwise meet.
There are immediate concerns that governments will mishandle the removal of pandemic-era support, as well as more enduring ones about whether they have been keeping alive zombie companies — ones that would have gone bust, crisis or no crisis, simply because they are no longer productive.
The goings-on at Greensill, meanwhile, as revealed by the Financial Times earlier this year, underline concerns that fraudsters will take advantage of the increasingly lucrative, but still poorly understood, market.
But the industry’s growth phase looks set to continue beyond the pandemic. They expect to be far more prominent in the coming years than in years past — and not because crises will now be the norm. Let us hope not, anyway.
Trade links
The head of a trade body representing European carmakers has warned that the industry must cut its reliance on Asia for semiconductors or risk a repeat of the crisis that has led to factory shutdowns across the continent. We are not so confident it is as simple as that, but there you go.
More on the car industry. Japanese car parts maker Denso, Ford Motor and BMW were among a group of 100 companies that have agreed on common standards (Nikkei, $) for pricing used electric vehicle batteries, a milestone for the second-hand electric vehicle market. A market for used batteries would, in theory, reduce reliance on China, which provides many of the minerals used to create batteries.
Commodity shortage alert. Car thefts are rising (Nikkei, $) in Japan, the US and UK. The cars are recovered later after robbers have removed the catalytic converter, which contains rare metals now worth more than gold.
Source: Economy - ft.com
