Export credit guarantees (Hermes insurance)

Background

For decades, federal federal export credit guarantees (Hermes insurance policies) have served as an important instrument in Germany’s policy to promote foreign trade and investment. They protect exporters and banks against the risks of payment defaults caused by economic or political circumstances. Coverage is available along the entire value chain – from the manufacturing process to delivery, up to receipt of the last instalment.

When an export credit guarantee is issued, a major portion of the risk of payment default is assumed by the Federal Republic of Germany. Companies receiving this cover pay a premium (fee) commensurate with the risk. If damage is suffered, the Federation pays compensation for that as far as the risk is covered.

Export credit guarantees play a key role in risk mitigation and financing. The Federation’s excellent creditworthiness translates into a much lower risk. This in turn then allows for much better financing conditions. In many cases, federal export credit guarantees are a prerequisite for the banks to provide financing for a business deal.

In principle, the federal export credit guarantees are available to all exporting companies and banks providing export financing, as long as they are based in Germany. This applies regardless of the company’s size or the size of the business transaction to be covered. Whether or not an export credit guarantee can be granted depends on whether the transaction is considered worthy of support and whether the risk level is acceptable.

A delivery or service provision will be considered worthy of support if it meets criteria including the safeguarding or creation of jobs in Germany and the development of new sales markets. Business transactions made by small and medium-sized enterprises are considered particularly worthy of support.

For the risk level to be acceptable, there has to be a realistic prospect of seeing the relevant export project through without damage.

Export credit guarantees supplement the insurance coverage available from private-sector credit insurers. They can be used where the private sector fails to offer (sufficient) coverage. As a result, federal export credit guarantees are mainly used to provide insurance for exports of goods and services to emerging markets and developing countries.

Economic policy objectives

The OECD member states have agreed in their Consensus to comply with certain requirements for government-supported guarantees and the financing of export business deals so as to avoid distortions of competition caused by the various government schemes for export financing and export credit insurance. Within the EU, additional harmonised rules apply. These are binding on all EU member states. An important task for the Federal Ministry for Economic Affairs and Climate Action is to help develop the international rulebooks to bring them in line with current developments. This is to ensure that exporters compete on price and quality rather than on the amount of government support they receive.

In 2023, the European Union agreed on new rules on export financing with members of the OECD. These notably include longer maximum credit terms, more flexible repayment profiles and a widening of the scope of the Climate Change Sector Understanding agreement. The modernisation of the OECD Consensus creates important incentives for the export of technologies that are particularly climate-friendly and relevant for the green transition.

Export credit guarantees granted by the federation in 2022

In 2022, the Federal Government provided export credit guarantees for exports worth €20.2 billion. Most of these exports of goods and services were destined for emerging economies and developing countries. In fact, this was true of 82.8% of the volume of newly issued export credit guarantees.

Once again, the export credit guarantee scheme resulted in a profit for the federation in 2022, generating €413 million.

Export credit guarantees – responsibilities and management

Euler Hermes AG has been commissioned by the Federal Government to implement the export credit guarantees funding instrument. The overall coverage policy and the decision as to which applications for export credit guarantees are to be approved lies with the Interministerial Committee for Export Credit Guarantees. Decisions are taken by consensus. In addition to the Federal Ministry for Economic Affairs and Climate Action as the lead ministry, the Federal Ministry of Finance, the Federal Foreign Office and the Federal Ministry for Economic Cooperation and Development are also represented in the Committee.

Compliance with environmental and social standards and observance of human rights

The Federal Government has made compliance with environmental and social standards and observance of human rights important criteria for the decision as to which exports are to be given export credit guarantees. No coverage is provided for export deals that contravene internationally agreed environmental, social or human rights standards.
For projects and transactions within the scope of the OECD Common Approaches (Recommendation of the Council on Common Approaches for Officially Supported Export Credits and Environmental and Social Due Diligence), environmental, social and human rights aspects are set criteria in the assessment process.

If there are indications that a project might have a significant negative environmental or social impact or that it might violate human rights, it will be subject to an environmental, social and human rights assessment even where it does not fall within the scope of the Common Approach.

Export credit guarantees and their contribution to climate action

The Federal Government is very much looking into the question of how the guarantee instruments designed to promote foreign trade and investment can make an additional contribution to the targets of the Paris Climate Agreement. In 2020, the Federal Government expanded coverage for exports in the field of renewable energies and introduced more favourable financing opportunities for such exports. Also, the Federal Government has decided that it will no longer provide coverage for exports that have a strong negative effect on the climate.

Both measures are part of the Climate Strategy that will enter into force in Q4 of 2023. The Climate Strategy is to support German exporters in the transition towards a low-carbon economy by providing a reliable framework that offers them and their foreign customers a reliable basis to plan on. The Strategy wants to ensure a level playing field in the area of export credit guarantees and prevent German companies from having to suffer competitive disadvantages.