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Hello from Budapest. We are fortunate enough to write these words from one of the city’s finest hotels, located right next to the Danube. Looking out the window, we couldn’t help but notice the absence of the sightseeing cruisers that once dotted the river.
They are sorely missed. The first three waves of coronavirus infections are already behind us, but with a fourth intensifying, tourism is still a shadow of itself and business travel is skeletal. It’s a similar story in much of the world right now.
One part of the economy that is doing rather better, however, is commerce. There are many reasons for the recovery in exports since the second half of 2020, but one of them has not received much attention, and that is the actions of the export credit agencies.
For today’s lead story, we interviewed the head of the Berne Union, an association of export credit agencies, to find out how she helps exporters arm themselves against the drawbacks of pandemic through export credit and insurance.
The hidden helping hand of export credit agencies
If you’ve never heard of the Berne Union, don’t be too hard on yourself. The association can serve a confluence of governments, exporters and importers, private and public lenders and insurers, but the area in which it operates – export credit – remains largely obscure to anyone who do not participate directly.
But, as people interested in trading, we really think you should know more. One of the reasons is that the Berne Union operates worldwide. And by everywhere we mean everywhere – countries like the United States and China or Iran and Israel can freely discuss trade issues at Berne Union conferences, even political considerations mostly taking a back seat.
It is this cooperative environment that made it possible to prevent exporters from going permanently bankrupt when the coronavirus effectively put an end to cross-border movements in the spring of 2020.
Export Credit Agencies (ECAs) provide two main types of support. Credit insurance protects exporters against non-payment of customers due to political or business risks, while investment insurance protects against losses of cross-border investments due to political risks.
During the pandemic, members of the Berne Union provided $ 2.5 billion in cover, its president Michal Ron told Trade Secrets. In total, the business volume supported by members increased by 2.4% between 2019 and 2020.
Of course, that’s the nature of this business – times of economic uncertainty such as those we find ourselves in require more safety nets. Especially when you are undertaking risky business such as sourcing goods from across the world. But there is a feeling that the industry has learned lessons from the financial crisis of 2008, when world trade collapsed.
While the coronavirus crisis was not financial at its root, it had a huge impact on both the financial sector and finance in general. As the initial blockages and border closures made trade impossible, the disruptions could easily have escalated into a domino effect – and the pressure tends to find weak spots in the supply chain, easily forming a credit crunch and liquidity.
As governments and industries looked to ECAs to fill the void, notable differences from 2008 became apparent. ECAs, made possible by digitization, have evolved rapidly.
The role of ECAs widened 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 need to link to a specific export transaction,” Ron told us. “The national products of ECAs increased by half in 2020 for a total of 78 billion dollars. This is a fairly large sum ”.
ECAs were also nimble and often saw red lights first. They launched aid to hard-hit sectors – such as tourism, aviation and industries hit by the trade shutdown, including oil, gas and other extractive-based industries – before governments take action, helping to save businesses and jobs. European ECAs developed a standard way to restructure aircraft debt as air travel came to a halt and several airlines battled insolvency. Airbus – whose exposure was covered by UK Export Finance, Euler Hermes in Germany and Bpifrance – was one of the beneficiaries.
The reaction was similar around the world. “We haven’t heard of any major or even minor ECA that has reduced his risk appetite – quite the contrary,” Ron said. “ECAs have stepped up to support not only domestic exports, but also private sector financing. We have not seen any specific capacity constraint in this area. “
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 seen as much more important than before. In this type of environment, hybrid players such as ECAs have a large room for growth.
“We have ECAs which are government agencies reporting directly to a ministry,” she said. “Others are corporations with a government shareholder. Some just use direct government funding – it depends. We are very heterogeneous.
In an age defined by escalating trade disputes, these hybrid models can pull the conversation out of worn-out (and somewhat dysfunctional) channels and allow for dialogue between partners who are unlikely to meet otherwise.
There are immediate fears that governments are mismanaging the removal of support in the era of the pandemic, as well as more enduring support for whether they have kept zombie companies alive – ones that would have gone bankrupt, crisis or not. crisis, simply because they are no longer productive.
The events at Greensill, as the Financial Times revealed earlier this year, underscore fears that fraudsters are taking advantage of the increasingly lucrative, but still poorly understood market.
But the industry’s growth phase is expected to continue beyond the pandemic. They expect to be much bigger in the years to come than in years past – and not because crises will now be the norm. Hopefully not, anyway.
The head of a professional body representing European manufacturers warned that the industry must reduce its dependence on Asia to semiconductors or risk a repeat of the crisis that led to plant closures across the continent. We’re not convinced it’s that easy, but there you go.
More on the automobile industry. Japanese manufacturer of auto parts Denso, Ford engine and Bmw were part of a group of 100 companies who agreed on common standards (Nikkei, $) for the pricing used electric vehicle batteries, an important step for the used electric vehicle market. A market for used batteries would, in theory, reduce dependence on China, which supplies many of the minerals used to create batteries.
Raw material shortage alert. Car thefts are on the rise (Nikkei, $) in Japan, the United States and the United Kingdom. The cars are later recovered after thieves remove the catalytic converter, which contains rare metals that are now worth more than gold.
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