Making state export credit guarantees fit for the future
Companies need reliable financing for their export business. The export credit guarantees of the Federal Government, the so-called Hermes Cover, are therefore an important component of German foreign trade promotion. The guarantees protect local companies against economic and political risks and help to preserve jobs in Germany.
Demand for Hermes Cover increased significantly
According to the Federal Ministry for Economic Affairs and Climate Protection, in 2020 alone the Federal Government secured exports worth 16.7 billion euros against payment defaults with state export credit guarantees. Exports to emerging and developing countries accounted for the largest share, at over 80 percent. While the volume of cover decreased, among others, because of a decline in major projects in the transport sector the Corona pandemic caused the demand for Hermes guarantees to increase significantly.
Avoiding distortion of competition
The export credit agencies of the member states of the Organisation for Economic Co-operation and Development (OECD) are governed by the OECD Consensus. With this agreement, the participating countries have agreed on uniform minimum standards for payments and credit periods to ensure a level playing field. Due to the growing number of international competitors, however, German companies are coming under increasing pressure. Non-OECD competitors who are not bound by the rules are increasing their competitiveness through high government subsidies and credits. But even within the OECD there is a “race to the bottom” for financing conditions that do not comply with the existing set of rules. This ruinous subsidy competition must be stopped by making the consensus rules more flexible.
“Small ticket” financing
Hermes cover is intended to support above all small and medium-sized enterprises in accessing new markets, especially in emerging and developing countries. Using “click & cover”, standardised transactions and financing can be digitally secured quickly and easily. One challenge, however, remains the financing of so-called “small tickets” - financing for contract values of less than five million euros. These are particularly important so that SMEs can also finance small-volume foreign projects. This requires a close link between risk insurance and banking products, e.g. through a special forfaiting vehicle.
A “Hermes reform” is needed
The criteria for Hermes coverage should be expanded to include additional factors, on the one hand with regard to new digital business models (“equipment as a service”, software-based solutions). On the other hand, eligibility for funding should be less linked to “national content”, i.e. the German share of value creation, and instead be examined more flexibly in terms of “national interest”, i.e. a high funding effect independent of the German share of value creation. This is the only way to properly take into account the reality of higher foreign value-added shares in the downstream chain, also on the way to climate neutrality.
Dovetailing with development cooperation and incentives for climate protection and sustainability
For export projects that are particularly relevant to climate policy, development cooperation funds should be used in addition to traditional export promotion through export credit guarantees, e.g. with the help of innovative instruments such as the development investment fund. The coverage of export credits must continue to be designed in a way that is open to technology, in order to support other regions of the world in achieving significant emission reductions. In addition to the existing purposes such as securing raw materials and projects in the special interest of Germany, the Untied Loan Guarantees (UFKs) should be opened for foreign projects that make an extraordinary contribution to the transformation of the German economy towards greater climate neutrality (climate UFK).
- Modernisation of the OECD Consensus
- Simplification and digitalisation of Hermes cover procedures
- Hermes reform for new digital business models and sustainability
- Dovetailing export financing and development cooperation