International agreements governing export credits

An exporter who offers advantageous financing often wins the contract. For a long time, this logic led governments to subsidise their exporters with subsidised loans. The result was costly and sterile competition between economic powers.

The OECD Arrangement: origin and legal nature

The Arrangement on Officially Supported Export Credits has its origins in the rules established as early as 1953 by the Berne Union. These initial initiatives, promoted by credit insurance organisations, were designed to limit the escalation of public aid.

It was finally under the aegis of the OECD that, from 1974 onwards, increasingly restrictive agreements were drawn up to provide a framework for the public support for export credits. The current version dates from 1 July 2007.

The Arrangement is neither an international treaty nor an official act of the OECD. It is a "gentlemen's agreement" - a non-binding agreement between participants. The text itself specifies this legal nature: " The Arrangement is a non-binding Gentlemen's Agreement between the participants; it does not constitute an act of the OECD, but enjoys the administrative support of the OECD Secretariat. "(Arrangement, section 2).

Despite this flexible qualification, the Arrangement is respected by all the major exporting countries, including the European Community, the United States, Japan and Canada.

General provisions of the Arrangement

Country classification

The Arrangement is based on a binary classification of borrowing countries:

• Category I: "relatively rich" countries (mainly those to which the World Bank does not grant loans)
• Category II: "intermediate" countries

This classification, simplified by the "Schaerer package" reform of 1994, determines the conditions applicable to loans.

Limits to public support

The Arrangement imposes several restrictions:

Minimum deposits The following conditions must be met: State-supported credits cannot finance the entire contract. A minimum deposit of 15% is required (Arrangement, section 10, a).

Maximum durations For Category I countries, credits may not exceed 5 years, or even 8.5 years with prior notification. For Category II countries, the limit is set at 10 years (Arrangement, section 12).

Ban on bonuses Subsidised rates are prohibited, regardless of the country category. Only stabilisation procedures at the reference commercial interest rate (CIRR) remain authorised.

Harmonisation of credit insurance premiums The "Knaepen" package, incorporated into the Arrangement in 1997, sets minimum premium rates for sovereign and country risk cover.

Rules on tied aid credits

Tied aid credits are prohibited if they are granted to countries whose GNP makes them ineligible for 17-year World Bank loans (Arrangement, section 33, a).

In other cases, these credits must have a concessionality level (share of the grant element) of at least 35%, or 50% for the least developed countries (Arrangement, section 35).

Overriding sectoral agreements

Four sectoral agreements annexed to the Arrangement contain specific provisions:

Ships

For new ships or ship conversions (Annex I) :

• Maximum duration: 12 years
• Minimum deposit: 20%
• Requirement that the vessel not be operated under a flag of convenience during the repayment period

Nuclear power stations

For nuclear power plants or their components (Annex II) :

• Maximum duration: 15 years (4 years for the first fuel deliveries)
• Interest rate: no more favourable than the CIRR (CIRR plus)
• Tied aid prohibited

Civil aircraft

The agreement distinguishes several categories of aircraft (Annex III):

• Category 1 (large aircraft): maximum repayment of 12 years
• Category 2: maximum repayment of 15 years
• Category 3 (business jets): maximum reimbursement of 10 years

Renewable energy and water resources

The agreement (Annex IV) provides for a maximum repayment period of 15 years to encourage these projects.

Notification and alignment procedures

The Arrangement provides for transparency and fair competition mechanisms:

Prior notification Any participant wishing to deviate from the provisions must notify the others. This obligation applies in particular to :

• Loans to Category I countries in excess of 5 years
• Loans for non-nuclear power plants exceeding certain durations
• Loans that depart from normal repayment practices

Notification deadlines This is generally 10 days before commitment for export credits and 30 days for aid credits.

Alignment procedures The conditions of the derogation: competitors may align themselves with the derogating conditions after notification. This alignment may be "identical" or take another form.

The practical impact for French exporters

For French exporters, these rules have transformed the export financing landscape:

1. End of systematic bonuses Exporters can no longer rely on artificially low rates to attract customers.
2. Support specialisation French policy has shifted towards strategic sectors (aeronautics, heavy equipment) where sectoral agreements allow greater flexibility.
3. The need for financial engineering Exporting companies now have to devise complex financial packages combining different sources of finance.
4. Increased importance of credit insurance With direct financial support declining, COFACE plays a central role in securing operations.

It should be noted that The European Commission has sole competence to negotiate these arrangements on behalf of Member States. Directive 84/568 of 27 November 1984 also recommends cooperation between European credit insurers for operations involving intra-Community subcontracting.

Our export customers regularly consult us for maximise the support available within this restrictive framework. An optimised set-up can make the difference between winning and losing a contract.

Sources

• Arrangement on Guidelines for Officially Supported Export Credits (version of 1 July 2007)
• G. Betbeder, "L'arrangement relatif à des lignes directrices sur les crédits à l'exportation avec soutien publique. Quelques enseignements", Revue du Marché Commun, No. 273, 1984.
• OECD, "The Export Credit Arrangement. Achievements and Challenges 1978-1998".
• Decision 84/568 of the Council of the European Communities of 27 November 1984
• Opinion of the ECJ of 11 November 1975 on the legal nature of the Arrangement
• P.-M. Eisenmann, "Le gentlemen's agreement comme source du droit international", Journal du droit international (Clunet), 1979.