Public financial support for export credits: a changing system

In the arena of international trade, public financial support for export credits is a powerful economic lever. Unknown to the general public but essential for exporting companies, this mechanism has undergone profound changes in recent decades. Here's an overview of this strategic mechanism and its legal implications for French exporters.

The strategic importance of public support

Export development is a key driver of economic growth. However, this activity generates significant financing requirements at favourable rates. The risks inherent in international trade - unfamiliarity with foreign contractors, risk of default by foreign debtors, political risk - make exporters' actions uncertain.

This is why governments have set up public institutions and procedures to promote export financing and risk coverage. As outlined in fascicule 1050 of the JurisClasseur Droit bancaire et financier on export credits, this support can take several forms:

• Rate bonuses
• Favourable impact on interest rates
• Direct loans granted by a national specialised institution
• Credit insurance policies granted on behalf of the State

Changes in French support procedures

From mobilisation to stabilisation

The classic technique used by the French State was to mobilise loans at a preferential rate. Franc-denominated buyer credits granted before 1986 were mobilised by the Banque de France, which expected secondary effects endorsed by the BFCE (Banque française du commerce extérieur).

This procedure was abandoned in favour of a procedure known as "stabilisation". Introduced in France in 1982, stabilisation consists of the State paying (or collecting) the difference between the credit exit rate and the cost of refinancing the banks.

Successive reforms

The French system has undergone a number of changes since the 1980s:

• 29 November 1982: introduction of foreign currency buyer credit with stabilisation procedure
• 24 December 1985: abolition of public financial intervention for franc loans to "relatively rich" countries
• 29 January 1986: stabilisation replaces mobilisation for medium-term loans
• 20 July 1989: stabilisation extended to all export credits, irrespective of term

These measures are part of a wider movement to "debonify" and reform the financing of the economy, as analysed by J.-Ch. Naouri in his article "La réforme du financement de l'économie" published in Banque magazine in March 1986.

Calculating stabilisation: a complex process

The Banque française du commerce extérieur (BFCE) was initially responsible for managing the stabilisation procedure. Despite its privatisation and merger with Crédit National within the Natexis group, this function was retained.

The calculation of the banks' refinancing rate, a key element in stabilisation, has evolved over time:

1. For the manufacturing period: application of the one-year money market rate
2. For the repayment period: use of the TRIBOR (reference rate of the bank indicator of origin of the resources).

In 1996, a simplification was introduced: institutions using stabilisation were deemed to refinance at the Paris interbank rate (in francs) or LIBOR (in foreign currencies). Since 1999, with the advent of the euro, EURIBOR has been the reference rate for stabilisation in euros.

The banks' margin is set by the authorities and varies according to the amount and type of credit:

• 0.85% for buyer credits of less than €3 million
• 0.75% for larger buyer credits
• 0.725% for supplier credits up to the seventh year, then 0.175% thereafter

Mixed credits: additional leverage

To stimulate French exports, mixed credits can be set up. These combine Treasury loans on very advantageous terms with buyer credit.

These operations are based on an intergovernmental protocol, supplemented by implementing banking protocols. The latter often take the form of simple "charge sheets" referring to the main protocol, as explained by M.-F. Baud in his article "Les accords gouvernementaux" published in MOCI in December 1985.

Current constraints and opportunities

The system of public support for export credits continues to evolve under the influence of several factors:

1. International regulations, in particular the "Arrangement on Officially Supported Export Credits" negotiated under the aegis of the OECD.
2. European rules on State aid
3. International competition and the need to maintain the competitiveness of French exporters

Companies now have to juggle different categories of export credit:

• Managed" or "conventional" loans backed by a COFACE guarantee and a subsidy procedure
• Pure guarantee" loans, covered by COFACE but without financial support
• Free" loans, without public procedure

In practice, these different forms are often combined. The same export may be financed partly with public support and partly with free credit, sometimes called "accompanying financial credit".

There are a number of factors to consider when setting up state-supported export financing:

• Classification of the importing country ("relatively rich" or "intermediate" countries)
• Constraints on the maximum duration of loans
• Rules on minimum payments on account (generally 15%)
• Limitations on the financing of local expenditure

For an exporter, a detailed understanding of these mechanisms can make all the difference. The optimum legal set-up for an export operation depends not only on the commercial characteristics of the transaction, but also on the specifics of the public support system available.

The stakes can be considerable. A poor stabilisation calculation, an error in assessing the notification or alignment procedures set out in the OECD Arrangement, or a lack of understanding of the compatibilities between different types of support can compromise the profitability of an operation.

Our firm helps exporting companies optimise their financial packages. We can help you determine the most advantageous scheme for your particular situation and assist you with the relevant administrative procedures. Don't hesitate to contact us for an initial assessment of your export financing needs.

Sources

• JurisClasseur Banking and Financial Law, Fascicule 1050 : Export credits. Buyer and supplier creditby Gautier Bourdeaux, first published on 2 September 2009.
• Naouri, J.-Ch., Reform of the financing of the economyBank, March 1986, p. 211 ff.
• Baud, M.-F., Government agreementsMOCI, 23 December 1985, p. 15 ff.
• Law no. 97-1239 of 29 December 1997, amended by Law no. 2005-1720 of 30 December 2005 (article 41).
• Mattout, J.-P., International banking lawLa revue Banque, 3rd edition, 2004.