Beyond crisis response: export credit agencies as engines of global trade

Export credit agencies (ECAs), which traditionally step in as insurers of last resort during financial crises, can evolve into more proactive trade innovators. By leveraging hard-won expertise, they can create new markets and promote sustainable practices to build a thriving global economy.

The world economy contracts significantly following a major financial crisis. Despite the liquidity supply and support from central banks, global trade volumes notably decrease and do not easily rebound due to financial market instability. Trade finance, which is closely linked to commerce and finance, is particularly vulnerable during a financial crisis. The speed at which the economy recovers to normal determines the extent to which reduced export and import volumes recover to pre-crisis levels. Thus, a quick recovery is challenging.

During financial crises, countries swiftly provide liquidity through central banks as the “lender of last resort” to minimise the spread of the crisis. Additionally, they utilise official export credit agencies (ECAs) as the “insurers of last resort” to maximise the recovery of trade transactions. Should the future direction of ECAs be limited to acting as the insurer of last resort, or should they find ways to actively respond to recurring crises and increase the benefits of trade in a rapidly changing global trade environment?

Providing a vital lifeline for trade

The “lender of last resort” function emerged with the development of the British financial system in the 19th century, where credit-creating financial institutions began to appear. The term refers to the central bank’s role as the final option for supplying funds to financial institutions lacking liquidity in the midst of a financial market crisis. The importance of this function was highlighted during the 1866 financial crisis, when the Bank of England turned down a loan to Overend, Gurney & Company, a major London discount bank experiencing liquidity shortages, leading to the bankruptcy of over 200 businesses, including banks. Similarly, the “insurer of last resort” function of ECAs involves providing insurance and guarantees for commercial risks and political risks that private insurers or banks cannot underwrite, to support the continuity of trade transactions.

Historically, the “insurer of last resort” function of ECAs has played a crucial role in the trading sector during financial crises, when demand surpasses supply. South Korea, which experienced rapid economic growth post-war (a period known as the East Asian Miracle), faced a severe economic disaster due to the fallout of the 1997 Asian Financial Crisis. Under International Monetary Fund management, financial restructuring led to banks reducing export finance. K-sure (Korea Trade Insurance Corporation) established a special task force for export insurance to strengthen support in all stages (pre-shipment, post-shipment, claims and recovery), relieving the financial difficulties of export companies. During the 2008 Financial Crisis, when European private insurers reduced export insurance, the G20 resolved to provide liquidity amounting to $2.5 trillion through ECAs, filling the market gap left by reduced or suspended short-term export insurance by private insurers. Amid the Covid-19 pandemic, K-sure supported 19,000 companies in 2020 with comprehensive measures such as extending the pre-shipment export credit guarantee limit without reduction.

ECAs stepping into a more dynamic role

Is merely playing the role of “insurer of last resort” sufficient for ECAs to meet their objectives? Should their primary focus be on complementing market failures where private insurers cannot provide insurance or guarantees? During the 2008 financial crisis, major central banks, including the United States, did not strictly adhere to the classic lender of last resort principle known as “Bagehot’s Rule” (providing loans only to solvent but illiquid institutions, at a high interest rate to prevent over-borrowing, and requiring quality collateral). The principle of supporting only solvent institutions or applying penalty rates was considerably eased, allowing for more active policies that promptly managed the financial crisis.

ECAs should likewise move beyond their conventional role as insurer of last resort and work proactively to create export markets. With a history of around 100 years since the establishment of the UK’s ECGD in 1919, ECAs have expertise in trade finance, risk management, and legal understanding, along with proficiency in country risk rating, buyer’s credit rating, claims, and debt collection. Making use of these skills, ECAs should play a crucial role in boosting trade’s economic benefits and promoting sustainable financial practices.

Some ECAs are already making diverse efforts to function as “trade innovators.” For example, K-sure recently collaborated with multiple private financial institutions to promote export package finance, focusing on creating a new export finance market through a public-private partnership model. Furthermore, K-sure is leading the digital policy finance market due to its early adoption of digital technology. It has completed the automation of essential operations such as underwriting, claims and risk management, utilising AI and big data, and has considerably increased the provision of direct insurance and guarantees based on a paperless and non-face-to-face approach. Another example is the establishment by the ECAs of Canada, Denmark, Sweden, and the UK of the Net Zero Export Credit Agencies Alliance (NZECA) in 2023. They pursue the global goal of achieving net-zero carbon emissions by 2050 and lead sustainable trade finance by encouraging trade decarbonisation.

Trade has been a key driver of modern financial market development. Beyond generating profits through transactions, trade provides multifaceted benefits across the economy. It creates markets, lowers unemployment, and accelerates economic growth. ECAs should enhance their roles as trade innovators, becoming the hub of a dynamic economy. By doing so, they will improve the sustainability of the world economy and help foster economic growth.