RISK MITIGATION DEVICES


1) Why are they needed?

If Globalization has made the world somewhat smaller,it has not abolished the wide disparities between the various countries of the planet, nor their differences in language, culture, legal system and business etiquette. Attracted by higher spreads outside of their national borders, commercial lenders have repeatedly tried to down play the "foreign risk" inherent to international finance, which resulted too often in colossal losses for them. Learning from their previous mistakes, they are not keen any more on financing international transactions, particularly with Developing Nations, unless they can be adequately protected from the "foreign risk" that they entail.

2) Who Provides risk mitigation?

The governments of the industrialized world have long ago realized that:

• exporting was good (like in the U.S.) or even vital (like in Western European countries and Japan) for their respective economies.
• only the state could mitigate the "foreign risk "that hampered the financing of export trade by domestic commercial lenders.

Hence, the creation of national export credit agencies, such as COFACE in France or HERMES in Germany, to provide the mitigation devices necessary to the financing of exports. Our export credit agency, located in Washington, D.C., is called the IMPORT-EXPORT BANK OF THE UNITED STATES "EX-IM BANK".

The private sector (large insurance companies and banks subsidiaries, called Forfait Houses) started providing foreign risk mitigation to U.S. exporters and their lenders ten years ago. It is gaining a larger share of the business for risk mitigation to first and second tier countries, particularly in the short term area, but cannot yet complement Ex-Im Bank for third and fourth tier ones.

3) Risk mitigation devices frequently used:

A) Short term export credit insurance:
Protects.exporter's foreign receivables up to 180 days against non-payment, which enables sales of consumables and parts on open account terms at no risk. It also allows for their financing by commercial banks. Short term export credit insurance is an excellent marketing tool to increase U.S. sales abroad as it eliminates the need for secure payment terms, like cash in advance or letters of credit. Since costs of borrowing are often prohibitive in second and third tier countries, export credit insurance provides much needed supplier's credit at competitive rates: U.S. quality + U.S. financing at U.S. rates is a winning combination in export markets!

B) Medium term insurance and medium or long term guarantees:
Ex-Im Bank will insure or guarantee, up to 85%, the term loans, from two to ten years, that commercial banks extend to foreign buyers of U.S. durable goods and services. Since Ex-Im Bank's insurances and guarantees carry the full faith of the U.S. Government the rates of interest on these loans are very low.

C) Working capital guaranteed lines of credit:
Ex-Im Bank will guarantee 90% of the working capital lines of credit that commercial banks provide to small U.S. exporters who do not meet normal lending criteria. MFS's founder has used this particular risk mitigation device to "jump start" export trading firms after only twelve months of existence.