Hermes cover

A Hermes cover (Hermesdeckung in German) is an export credit guarantee (ECG) by the German Federal Government.

These guarantees are an important part of German foreign trade policy and protect German companies in the event of non-payment by foreign debtors.

Economic importance

The system of Hermes covers was originally introduced in 1949 for cases where firms could find no private insurance and has become a pillar of Germany's export industry.[1] Today, Hermes guarantees enable exporters to cover themselves against economic risks (customer risks) and political risks (country risks). The federal guarantee is necessary because it is not possible to obtain adequate cover from private insurers, particularly against political risks for exports to non-OECD countries.

In 2005, the German state made guarantees for orders totaling EUR 19.77 billion (USD 25 billion), which is about 2.5 percent of total German exports. About 90% of the cover was accounted for by exports to developing countries and states in central and eastern Europe, including CIS countries. These guarantees only result in expenditure by the state if the customer does not pay.

The purpose of Hermes cover, from the point of view of the German state, is the promotion of exports and helping to provide German jobs.[2][3]

A study commissioned by the German Ministry of Economics and Technologies carried out by Prognos concluded that the net effect of Hermes guarantees on employment is in the order of 140,000 to 210,000 jobs, mainly in the mechanical engineering, electrical engineering, and chemical sectors, most Hermes guarantees being for small and medium-sized enterprises (SME). [4]

Management of the scheme

The management of the guarantees is in the hands of Euler Hermes (which is the lead) and PricewaterhouseCoopers. Decisions on matters of principle and the underwriting of large export transactions are made by an inter-ministerial committee comprising representatives not only of the German Federal Ministry of Economics and Technology but also of the Federal Ministry of Finance, the German Foreign Office and the Federal Ministry for Economic Cooperation and Development.

Cost

The charges for these export credit guarantees include an application fee, a policy-issuing fee, a risk-dependent commission, a duration-dependent commission, and an additional charge. The costs depend on the type, size, and duration of the transaction and on the risk assessment for the importing country. In the case of a claim, there is an excess paid by the exporter, generally between 5 and 15 percent.

Types of risk

Risks covered include political risks, such as bad debt losses due to legislative or administrative measures, war, and civil commotion, losses due to the inability to convert or transfer sums paid in local currency by the debtor due to restrictions in the international payment system, inability to fulfill the contract due to political circumstances, and loss of goods (before the risk has passed to the foreign buyer) due to political circumstances, such as the goods being confiscated or destroyed. They also include commercial risks such as protracted default and bankruptcy of the buyer.

Criticism

Hermes cover can be granted when the export transactions are worthy of support and the risks appear tolerable. The worthiness can result from job security, structural considerations or foreign policy objectives. In recent years, state Export Credit Agencies (ECAs), including Hermes have been increasingly subject to public scrutiny, because they backed projects that some disapproved of, for instance because of environmental concerns.[5]

Environmental aspects

The environment is an important issue when approving Hermes guarantees. When appraising the application, the environmental effects of projects are an important criterion, both in terms of their worthiness and the tolerability of the risk. As stated by the ECA, it is the aim of the German government not to support any projects that have serious negative ecological, social, or developmental consequences. Since January 1, 2004, the OECD "Recommendation on Common Approaches on Environment and Officially Supported Export Credits"[6] have been applied.[7] The procedure laid down there reflects international developments regarding the appraisal of environmental aspects by export credit agencies. The "Common Approaches" are a set as international obligatory rules for the environment and export credit guarantees, so they cannot take account of all national peculiarities; for this reason, the German national environmental guidelines of 26 April 2001 are applied in some areas.

References

  1. ↑ Madeline Chambers (August 20, 2015), German industry wants expansion of export guarantees Reuters.
  2. ↑ "Germany's Environmental Technologies Action Plan : Speeding up innovation – protecting the environment" (pdf). German Federal Ministry for the Environment, Nature Protection and Reactor Safety. Retrieved 2007-01-29. An important instrument in promoting the external sector is Federal Export Credit Guarantees (Hermes Cover). With Export Credit Guarantees the Federal Government strengthens the global competitive position of German companies, especially SMEs. It therefore makes a substantial contribution to protecting jobs in Germany. [. . .]In 2005 the Federal Government underwrote export credit guarantees amounting to €19.8 billion. 72.2% of the total exports were headed for emerging economies and developing countries and 18% for central and eastern Europe.
  3. ↑ "AuslandsGeschäftsAbsicherung der Bundesrepublik Deutschland (Foreign Trade and Investment Promotion Scheme of the Federal Republic of Germany)". Euler Hermes Kreditversicherungs-AG and PricewaterhouseCoopers. Retrieved 2007-01-28. There is a link to this site from the Web site of the German Federal Ministry for Economics and Technology
  4. ↑ Inge Weidig; Sönke Jens; Konrad Haker; Henrike Mohr (December 29, 2000). "Kurzfassung - Evaluierung der Arbeitsplatzeffekte der Hermes-Ausfuhr-Gewährlesitungen des Bundes (Proj. Nr. 7/00) (Assessment of job effects of Hermes federal export guarantees)" (PDF) (in German). Basel: Europäisches Zentrum für Wirtschaftsforschung und Strategieberatung (European center for economic research and strategy consultation); Prognos. Archived from the original (pdf) on 2007-09-27. Retrieved 2007-01-28.
  5. ↑ "ECA Watch: The Problems (Germany)". ECA Watch International NGO Campaign on Export Credit Agencies. Retrieved 2007-01-29. Euler Hermes Kreditversicherungs-AG (Hermes), the German ECA, has guaranteed some of the world's most controversial projects including the Three Gorges Dam, Tehri dam, the BTC pipeline, and the Paiton 2 power plant. It is often criticized for its lack of transparency and environmental standards.
  6. ↑ "Recommendation on common approaches on environment and officially supported export credits" (pdf). OECD. Retrieved 2007-01-28.
  7. ↑ "Germany's Environmental Technologies Action Plan : Speeding up innovation – protecting the environment" (pdf). German Federal Ministry for the Environment, Nature Protection and Reactor Safety. Retrieved 2007-01-29. International cooperation between the export credit insurers in industrialised countries of the OECD focused in 2005 amongst other things on the adoption of a new consensus text on flexibilised payment terms for project financing and structured finance and for export transactions in the field of renewable energies and water projects, which has been in force since 1 July 2005. The OECD Member States have agreed to extend the maximum repayment term permissible in the renewable energy field and for water and waste water projects to 15 years. Experience gained with the expanded OECD environmental guidelines, which entered into force on 1 January 2004, will be taken into account in the 2006 review process.

External links

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