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A UK industry group is calling for changes to international rules to allow export credit agencies (ECAs) to provide 100% insurance cover for trade transactions, helping ease the pressure caused by the global spread of Covid-19.

OECD rules mandate that ECAs can only provide insurance cover of up to 85% of a transaction, with banks expected to provide the remainder. However, the British Exporters Association (BExA) says financial institutions “are having significant difficulties in pricing the commercial 15% of export orders” as a result of market volatility.

The same issue was previously raised in a November 2019 paper authored by three industry bodies – the International Chamber of Commerce, the European Banking Federation and Business at OECD – which said it can be difficult to source funding in some markets, particularly in Sub-Saharan Africa.

BExA, which represents UK-based exporters and their service providers, says the outbreak of Covid-19 in the last three months “has compounded the problem”.

It makes the remarks in a letter sent to UK Export Finance (UKEF) last month. The letter urges UKEF to “take the lead” and approach the OECD, requesting temporary changes to its restrictions so that ECAs can fully cover the value of a contract.

“Unless action is taken, export volumes will suffer,” the letter says. “Not just from the UK but from every major exporting country and developing countries will bear the brunt.”

BExA adds that the reforms should only apply “whilst the markets are in flux as a result of the Covid-19 pandemic”, and should be limited to transactions supporting developing markets only.

Individual ECAs have already unveiled initiatives designed to ease the pressure on both banks and exporters, and Poland’s Kuke has announced it will take on 100% political and commercial risk for all financing or refinancing export transactions.

But according to Gabriel Buck, managing director of consultancy firm GKB Ventures, an international solution is needed urgently.

“If the development banks and ECAs don’t come up with a global solution, there is a risk the markets could be paralysed for a long period of time,” he tells GTR. “What I believe is the ECAs need to come together. We need global co-operation and a global solution implemented now.”

The virus is already hitting the financial sector. “Many banks are not on-boarding new clients at present, and existing clients are drawing down on their lines, taking cash where they can,” Buck says. “At the same time, banks are struggling to manage excess demand, and funding is proving challenging even for those with the best credit ratings.”

For ECAs, that means assessing whether existing transactions carry a default risk while encouraging domestic companies to continue exporting.

“Then, ECAs need to encourage buyers to continue to undertake new capital expenditure programmes,” Buck adds. “There’s no point just providing working capital facilities to a supplier when there’s no demand from buyers. They also need to keep banks engaged in taking on new business.”

Johanna Wissing, Lloyds Banking Group’s director of global transaction banking for Asia Pacific, agrees that ECAs increasing cover to 100% “could certainly help the commercial banks to provide more liquidity, especially for the shorter and smaller lines”.

“Normally risk-sharing between a commercial bank and an ECA makes sense, but in times like this, in order to respond quickly to demand, it would be much easier if the ECA could just provide 100% cover to the commercial bank,” she tells GTR.

“The bank will of course still have to review the underlying credit as the ECA is only the last resort in case the underlying fails, but getting 100% cover can speed up the process. Credit teams at commercial banks are understandably incredibly busy right now managing more requests than normal from customers, while also facing the same challenge of staff absences as everyone else, so if facilities they are working on have 100% cover that’s a great help.”

One potential barrier may be if increased ECA cover could be considered a breach of state aid rules, also established by OECD consensus. But for GKB Ventures’ Buck, expanded export insurance cover is unlikely to be considered state aid if it is only provided to a developing market borrower.

“I could see the state aid issue coming up if ECAs were providing better-than-market support to their own domestic supplier or buyers that distorts the competition or the free market,” he says. “But where you are providing funding to a developing market borrower, outside of the EU, then I don’t see state aid rules applying particularly at a time when there’s a crisis.”