SUMMARY
-------
1. IN RESPONSE TO MANY INQUIRIES, THIS IS A THUMBNAIL SKETCH (IN Q AND A FORMAT)
OF "HERMES," THE FRG'S EXPORT CREDIT GUARANTEE PROGRAM. IT ATTEMPTS TO HIT
THE MAIN POINTS NECESSARY TO UNDERSTAND ROUGHLY HOW THE PROGRAM OPERATES.
END
SUMMARY.
WHAT IS "HERMES"?
-----------------
2. HERMES IS THE NAME OF A PRIVATE INSURANCE COMPANY THAT HAS
THE GOVERNMENT MANDATE (CONTRACT) TO RUN THE GOVERNMENT CREDIT
EXPORT PROGRAM, IN CONJUNCTION WITH A PARTLY-PRIVATE ACCOUNTING
FIRM (COOPERS & LYBRAND DEUTSCHE REVISION). THE NAME "HERMES"
THEREFORE IS ONLY A COLLOQUIAL TERM FOR GOVERNMENT EXPORT
CREDIT GUARANTEES. HERMES MAINLY DOES PRIVATE CREDIT INSURANCE: OF ITS APPROXIMATELY
2,000 EMPLOYEES, ONLY 400 WORK
ON THE GOVERNMENT CONTRACT BUSINESS. HERMES IS PAID A SET FEE
TO RUN THE PROGRAM AND DOES NOT GET A COMMISSION ON ANY PROFIT
REALIZED.
WHAT IS AN EXPORT CREDIT GUARANTEE ANYWAY? ------------------------------------------
3. BASICALLY, THE GUARANTEE COVERS THE GERMAN EXPORTER'S RISK
OF NOT GETTING PAID. IN EFFECT, THE EXPORTER IS "LOANING" MONEY TO THE IMPORTER
BY SENDING HIS GOODS ON CREDIT. ALTERNATIVELY, THE EXPORTER GETS A GERMAN
BANK TO "LOAN" THE
MONEY TO THE IMPORTER, I.E. PAY THE EXPORTER UP FRONT. MOST CREDITS ARE SHORT
TERM BECAUSE THE IMPORTER PAYS BACK THE EXPORTER OR THE BANK SOON AFTER THE
SHIPMENT ARRIVES. LONG AND
MEDIUM TERM CREDITS ARE FOR CASES WHERE THE IMPORTER IS WAITING
FOR SALES PROCEEDS BEFORE PAYING THE EXPORTER/BANK. ONGOING
SHIPMENTS GET REVOLVING CREDIT, I.E. THE ORIGINAL CREDIT IS GOOD FOR EACH
SUCCESSIVE SHIPMENT. THE GUARANTEE CAN BE ISSUED
ON BEHALF OF THE EXPORTER OR THE BANK, DEPENDING ON WHO IS ISSUING THE CREDIT.
4. IMPORTERS ARE EITHER PUBLIC ENTITIES, OR PRIVATE ENTITIES THAT CAN BE DECLARED
BANKRUPT. THE FEES FOR PROVIDING THE INSURANCE AND THE CONDITIONS OF REPAYMENT
DIFFER DEPENDING UPON
WHO THE IMPORTER IS. OFTEN, IN CASES OF EXPORTS TO PRIVATE ENTITIES, A REPAYMENT
GUARANTEE FROM A BANK IN THE IMPORTER'S
COUNTRY IS REQUIRED. APPROXIMATELY 4-5 PERCENT OF ALL EXPORTS
LEAVING GERMANY HAVE A GOVERNMENT EXPORT CREDIT GUARANTEE, AND
ALMOST 90 PERCENT OF THE GUARANTEES ARE FOR EXPORTS GOING TO
THE DEVELOPING WORLD AND THE FORMER EASTERN BLOC.
HOW MUCH OF THE VALUE OF THE EXPORT SHIPMENT IS COVERED AND
WHAT IS THE FEE FOR THE GUARANTEE?
------------------------------------------------------------ 5. DEPENDING
UPON THE CONDITIONS SURROUNDING THE DEFAULT OF THE PAYMENT, 60-90 PERCENT
OF THE VALUE OF THE EXPORT SHIPMENT
IS COVERED. TRANSFERRING A PORTION OF THE RISK TO THE EXPORTER
OR HIS BANK ENSURES THAT FOOLHARDY DEALS ARE AVOIDED. ON TOP
OF AN APPLICATION FEE, THE FEE FOR THE GUARANTEE DEPENDS ON THE
RISK RATING FOR THE IMPORTING COUNTRY, THE LENGTH OF THE DEAL,
THE TYPE OF IMPORTER, AND THE VALUE OF THE SHIPMENT BEING COVERED.
WHY IS THE GOVERNMENT INVOLVED WHEN THE PRIVATE SECTOR ALSO
ISSUES EXPORT CREDIT GUARANTEES?
------------------------------------------------------------- 6. THE GOVERNMENT
FOCUSES ON AREAS SUCH AS POLITICAL RISK WHERE THE PRIVATE SECTOR WON'T PROVIDE
EXPORT "COVER" BECAUSE
THE RISK IS HIGHER. PRIVATE BANKS WILL PROVIDE SHORT TERM EXPORT COVER FOR
EVEN COUNTRIES THAT HAVE ONLY AVERAGE RISK
RATINGS. THEY WILL ALMOST NEVER PROVIDE MEDIUM AND LONG TERM
COVER, EVEN FOR COUNTRIES WITH GOOD RISK RATINGS. THE GOVERNMENT STILL DOES
PROVIDE COVER FOR "MARKETABLE RISK," BUT
IS MOVING AWAY FROM THAT AND INTENDS TO GET OUT OF THE BUSINESS
ALTOGETHER AT SOME POINT SO IT IS NOT COMPETING WITH THE PRIVATE MARKET.
WHAT DOES THE INTERMINISTERIAL COMMITTEE DO AND WHO PARTICIPATES?
----------------------------------------------------- 7. THE INTERMINISTERIAL
COMMITTEE BASICALLY RUNS THE PROGRAM
AND INSTRUCTS HERMES ON COVER POLICIES. THE COMMITTEE MAKES
EXPLICIT DECISIONS ON ALL PROJECTS IN EXCESS OF DM 5 MILLION AND ANY OTHER
PROJECT DEEMED SENSITIVE. THE COMMITTEE SETS COUNTRY RISK RATINGS IN ONE OF
FIVE CATEGORIES. CATEGORY FIVE
IS FOR HIGH RISK COUNTRIES THAT MOSTLY ARE NOT ELIGIBLE FOR HERMES COVER.
THE COMMITTEE IS CHAIRED BY THE MINISTRY OF ECONOMICS, WITH PARTICIPATION
FROM THE FINANCE MINISTRY, BMZ (THE DEVELOPMENT AID MINISTRY), AND THE FOREIGN
MINISTRY. ALTHOUGH FINANCE TECHNICALLY ISSUES THE GUARANTEE, ITS POWER ON
THE COMMITTEE DECREASED CONSIDERABLY LAST YEAR WHEN THE LONG
TIME EXPERT WAS PROMOTED TO ANOTHER SECTION. THE COMMITTEE IS
OFTEN UNDER PRESSURE FROM THE PRIVATE SECTOR, ONE NOTABLE CASE
BEING THE REOPENING OF NOMINAL COVER FOR IRAN IN THE SPRING OF
1995. THE COMMITTEE IS ALSO RESPONSIBLE FOR FINANCIAL ACCOUNTING OF THE PROGRAM.
WHAT HAPPENS IF THE IMPORTER DEFAULTS?
--------------------------------------
8. IF THE IMPORTER DEFAULTS, HERMES PAYS THE BANK OR THE EXPORTER. IN 95 PERCENT
OF THE CASES THE DEFAULT WAS DUE TO POLITICAL RISK, THAT IS THE GOVERNMENT
ON THE IMPORTING SIDE IS SOMEHOW INVOLVED - EITHER AS THE DEBTOR ITSELF OR
IT SOMEHOW
TOOK ON THE DEBT OF THE PRIVATE ENTITY. THE IMPORTING GOVERNMENT TAKES ON
THE DEBT USUALLY BECAUSE IT HAD ISSUED A
GUARANTEE TO COVER THE PRIVATE IMPORTER OR IT HAD IMPOSED EXCHANGE RATE RESTRICTIONS
THAT PREVENTED THE IMPORTER FROM
GAINING ACCESS TO HARD CURRENCY. IN THIS CASE, THE IMPORTER USES THE LOCAL
CURRENCY TO PAY THE CENTRAL BANK AND THE LIABILITY TO PAY IN HARD CURRENCY
IS TRANSFERRED TO THE CENTRAL
BANK.
9. WHEN GOVERNMENT DEBT BEGINS TO MOUNT UP AND THE GOVERNMENT
CAN NO LONGER PAY, THE CASE IS TAKEN TO THE PARIS CLUB WHERE
GERMANY AND THE OTHER CREDITOR NATIONS WORK OUT WITH THE DEBTOR
COUNTRY A RESCHEDULING AGREEMENT, ACCOMPANIED BY AN IMF STRUCTURAL ADJUSTMENT
PROGRAM. THE DEBT IS THEN PAID BACK DIRECTLY TO THE GERMAN GOVERNMENT.
HOW IS HERMES ACCOUNTED FOR IN THE GERMAN BUDGET? -------------------------------------------------
10. IT IS CASH IN- CASH OUT SYSTEM, DESCRIBED ONCE AS A "WALLET." WHEN HERMES
HAS TO PAY OUT, THE ENTIRE AMOUNT OF THE
PAYOUT IS SCORED AS A LOSS (DESPITE THE FACT THAT MOST OF THE
DEBT WILL STILL BE COLLECTED IN THE FUTURE AFTER IT'S RESCHEDULED). WHEN RESCHEDULED
PAYMENTS COME BACK IN, IT IS
COUNTED AS NEW REVENUE. IF PAYMENTS ARE MADE ON TIME TO THE
BANK OR EXPORTER, THE BUDGET IS NOT AFFECTED IN ANY WAY. THE
NET OF INFLOW AND OUTFLOW IN ANY YEAR IS CHARACTERIZED AS THE
HERMES "BALANCE," WHICH HAS BEEN NEGATIVE IN RECENT YEARS MAINLY BECAUSE OF
LARGE PAYOUT ON RUSSIAN DEAULTS. THE MEDIA
HAS SIMPLE-MINDEDLY PORTRAYED THE BALANCE AS A HERMES "DEFICIT"
WITHOUT EXPLAINING THE MISLEADING ACCOUNTING.
WHAT IS THE LEGAL AUTHORITY FOR HERMES COVER? ---------------------------------------------
11. THE GERMAN BUDGET LAW EMPOWERS THE MINISTRY OF FINANCE TO
ISSUE GUARANTEES FOR THREE CATEGORIES:
(A) NORMAL EXPORT ("HERMES") CREDIT GUARANTEES WITH A TOTAL CEILING ON EXPOSURE
IN 1996 OF DM 195 BILLION (TOTAL EXPOSURE AS OF THE END OF 1995 WAS DM 179.7
BN);
(B) INVESTMENT GUARANTEES, EUROPEAN INVESTMENT BANK GUARANTEES,
GUARANTEES ON KFW PARTICIPATION IN EUROPEAN INVESTMENT FUND,
AND SPECIAL CREDIT GUARANTEES, ALL WITH A TOTAL CEILING ON EXPOSURE IN 1996
OF DM 35 BILLION. THE SPECIAL CREDIT GUARANTEES WERE USED FOR LOANS SUPPORTIG
WITHDRAWAL OF RUSSIAN
TROOPS AND THE RECENT DM 4 BILLION WORTH OF LOANS FROM GERMAN
BANKS TO RUSSIA TO SUPPORT INCOME PAYMENTS; AND
(C) GUARANTEES TO GO ALONG WITH DEVELOPMENT AID PROGRAMS. THE
TOTAL EXPOSURE CEILING IN 1996 IS DM 1.35 BILLION. THIS CATEGORY REQUIRES
APPROVAL BY BUNDESTAG BUDGET COMMITTEE.
DOES THE GERMAN GOVERNMENT EVER EXTEND THE EXPORT CREDIT ITSELF
INSTEAD OF MERELY GUARANTEEING IT?
---------------------------------------------------------------- 12. IN A
SENSE, BUT NOT EXPLICITLY. KREDITANSTALT FUER WIEDERAUFBAU (KFW) WAS THE GOVERNMENT
ENTITY ORIGINALLY ESTABLISHED TO DISTRIBUTE MARSHALL PLANFUNDS AFTER THE SECOND
WORLD WAR. ALTHOUGH IT IS STILL 100 PERCENT OWNED BY THE GOVERNMENT, OVER
THE YEARS KFW HAS TAKEN ON THE PERSONA OF A
PRIVATE ENTITY. ITS CAPITAL BASE IS A MIX OF THE REMAINING ORIGINAL FUNDS,
AS WELL AS FUNDS IT HAS RAISED ON THE MARKET.
IT DOES CONTRACTING FOR THE FEDERAL GOVERNMENT, BUT ON THE SAME
TERMS AS A NON-GOVERNMENT ENTITY WOULD. KFW OFTEN EXTENDS
EXPORT LOANS, FOR MOST OF WHICH IT SEEKS HERMES COVER.
13. KFW ALSO PARTICIPATED IN THE RECENT GUARANTEED LOANS OF DM
4 BILLION TO THE RUSSIAN GOVERNMENT (WHICH WERE NOT TIED TO EXPORTS), BY PROVIDING
ITSELF DM 1 BILLION TO GO TO SMALL AND MEDIUM BUSINESSES IN RUSSIA VIA THE
RUSSIAN GOVERNMENT. THE ENTIRE DM BILLION WAS GUARANTEED BY THE GERMAN GOVERNMENT
OUT
OF THE DM 35 BN SPECIAL GUARANTEE AUTHORIZATION.
14. AUSFUHRKREDIT GESELLSCHAFT MBH (AKA) IS A CONSORTIUM OF 43
BANKS THAT OFFERS EXPORT LOANS, MANY OF WHICH RECEIVE HERMES
COVER. AKA USED TO HAVE A LOAN PROGRAM THAT WAS REFINANCED
THROUGH THE BUNDESBANK BUT THAT HAS BEEN PHASED OUT.
HOW DOES THE SYSTEM DIFFER FROM EXIM BANK? ------------------------------------------
15. EXIM OFFER BOTH EXPORT CREDIT GUARANTEES AND EXPORT LOANS
ND COVERS 100 PERCENT OF THE RISK (ALTHOUGH THAT MAY BE CHANGING). HENCE,
EXIM ITSELF EXAMINES THE VIABILITY OF THE DEAL MORE CLOSELY THAN HERMES, WHICH
CAN RELY MORE ON THE PRIVATE SECTOR TO WEIGH THE RISK. FURTHERMORE, EXIM DEALS
ARE
ACCOUNTED FOR IN THE BUDGET DIFFERENTLY. EXPECTED STREAMS OF
REVENUES AND LOSSES ARE REFLECTED IN THE BUDGET FOR A GIVEN
YEAR, RATHER THAN WHAT HAS BEEN PAID IN AND PAID OUT.
WHY HAS THE PAYOUT FOR RSSIA BEEN SO LARGE? -------------------------------------------
16. FOLLOWING GERMAN UNIFICATION IN 1990, THE GERMAN GOVERNMENT MADE THE DECISION
TO ISSUE HERMES EXPORT COVER ON
PREFERENTIAL TERMS FOR EASTERN GERMAN BUSINESSES WHOSE LIVELIHOOD DEPENDED
UPON EXPORTS TO THE SOVIET UNION (SOON TO
BE FORMER SOVIET UNION). SINCE ALL EXPORT LOANS WENT TO THE STATE (THE STATE
OWNS EVERYTHING IN A CENTRALLY PLANNED ECONOMY), THE GOVERNMENT RAN UP QUITE
A BILL AS THE SOVIET UNION WAS DISSOLVING IN 1991-92. RUSSIA STRUCK A DEAL
WITH THE
OTHER SUCCESSOR STATES THAT IT WOULD TAKE ON ALL OF THE DEBT OF
THE FORMER SOVIET UNION, SO THE MASSIVE CREDITS -- SOME DM 35 BILLION AS OF
THE END OF 1995 -- FELL SQUARELY ON ITS SHOULDERS.
17. PAYOUT ON CLAIMS TO RUSSIA REACHED DM 7 BN PER YEAR IN 1993-94. SINCE
IMPLEMENTATION OF THE 1995 PARIS CLUB RESCHEDULING, RUSSIA HAS BEEN PUNCTUAL
IN REPAYING ITS DEBTS,
HAS AVOIDED FURTHER INDEBTEDNESS, AND HAS BEEN SPARING IN ISSUING THE NECESSARY
STATE GUARANTEES TO ALLOW FOR EXPORT
COVER. RUSSIA USED ONLY TWO-THIRDS OF ITS INFORMAL HERMES CEILING OF DM 1.5
BN IN 1995. PAYOUT IN 1995 ON RUSSIA WAS DOWN TO DM 3.5 BN, AND THE ACCRUAL
OF DEBT HAS SLOWED DOWN
CONSIDERABLY. BECAUSE OF THE STAGGERING STOCK BURDEN OF DEBT,
A COMPREHENSIVE RESCHEDULING TOOK PLACE IN APRIL 1996 WHICH FURTHER DREW OUT
PAYBACK OF THE DEBT OF THE FORMER SOVIET UNION
AS WELL AS DEALING WITH NEW DEBT ACCRUED BY RUSSIA ITSELF (THE
NEW DEBT WAS NOT IN DEFAULT, BUT THE RESCHEDULING DREW OUT THE
REPAYMENT TERMS).
18. RUSSIA ALSO REACHED A RESCHEDULING DEAL WITH ITS PRIVATE
BANK CREDITORS WHO DID NOT HAVE CREDIT GUARANTEES VIA THE LONDON CLUB IN LATE
1995. THE RUSSIANS ARE ALSO NEGOTIATING WITH A GROUP OF INDEPENDENT SUPPLIERS,
WHO HAD EXTENDED CREDIT
THEMSELVES WITHOUT A GOVERNMENT GUARANTEE, TO RESCHEDULE DEBT.
AN AGREEMENT COULD BE CONCLUDED AS EARLY AS THIS SUMMER.
WHAT IS GERMANY'S COVER POLICY WITH REGARD TO IRAN? ---------------------------------------------------
19. GERMANY GRANTED A TREMENDOUS AMOUNT OF CREDITS TO IRAN IN
1991-92, RACKING UP A TOTAL OF ABOUT DM 12 BILLION IN EXPOSURE. IT BECAME
CLEAR THAT IRAN WAS RUNNING INTO PAYMENT
DIFFICULTIES, SO GERMANY CUT OFF NEW CREDITS TO IRAN IN EARLY 1994, IN PART
RESPONDING TO PRESSURE FROM THE U.S. THE U.S. OPPOSED AN OFFICIAL RESCHEDULING
THROUGH THE PARIS CLUB, SO THE
GERMAN GOVERNMENT INSTRUCTED THE PRIVATE CREDITOR BANKS TO GET
TOGETHER AND WORK WITH THE IRANIAN CENTRAL BANK TO "REFINANCE"
THE CREDITS. SIMPLY PUT, THE BANKS ROLLED OVER THE LOANS, WITH
THE HERMES GUARANTEES ROLLED OVER ONTO THE NEW LOANS. BECAUSE
OF THE LONGER REPAYMENT PERIODS ON THE NEW LOANS, THE TOTAL
STOCK OF DEBT ROSE VIA THE REFINANCING TO ABOUT DM 15 BN.
20. THE GERMAN GOVERNMENT REOPENED COVER FOR IRAN IN EARLY
1995 AND SET A VERY LOW CEILING OF DM 150 MILLION -- DM 50 MILLION FOR SHORT
TERM CREDITS AND DM 100 MILLION FOR LONG TERM
CREDITS. THE SHORT TERM CREDITS WERE USED UP ALMOST IMMEDIATELY, BUT THE BULK
OF THE MEDIUM AND LONG TERM CREDITS
REMAIN UNUSED BECAUSE THE IRANIANS THEMSELVES ARE UNWILLING TO
GIVE A GOVERNMENT GUARANTEE FOR THE LONGER TERM CREDITS. RIGHT
AFTER COVER WAS REOPENED, AKA AND ITS CONSTITUENT BANKS BEGAN
NEGOTIATING LOAN FRAMEWORK AGREEMENTS WITH IRANIAN BANKS SO
THAT CREDIT WOULD BE AVAILABLE IMMEDIATELY, IF AND WHEN IRAN STARTED GIVING
GOVERNMENT GUARANTEES AND GERMANY RAISED THE
CEILING ON CREDIT. THE IRANIANS, ACCORDING TO THE MINISTRY OF ECONOMICS, HAVE
BEEN "MODEL DEBTORS" SINCE THE 1994 REFINANCING. THE IRANIANS HAVE ALSO REACHED
DEBT RESCHEDULING
AGREEMENTS WITH PRIVATE CREDITORS, INCLUDING INDEPENDENT SUPPLIERS.
BINDENAGEL