THE FIRST QUESTION · THE ECONOMY · CURRENCY AND TRADE
A furniture importer buys in euros and sells in US dollars at fixed list prices. The dollar has fallen 15% against the euro.
// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON
Export Credit Agency Cover: a Worked Example
Part of the loan is owed by the state, if the conditions hold.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
Export credit agency cover moves part of a bank's export loan, or part of an exporter's receivable, onto a government's balance sheet. The business still owes the bank everything, but if it fails, the agency pays the covered share of the loss. That changes three things in a file: the loss the bank can suffer, the capital it may need to hold, and the rules it must keep, because the cover pays only if its conditions were met. A lender therefore reads the agency's guarantee or policy as carefully as the borrower's accounts, and keeps reading it for the life of the loan.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// MAKE THE CALL
Issue 02 — Aoraki Trade Exports. Paid in USD, costs in NZD, asking for a NZ$6m multi-currency facility. The MD won't say which currencies. Your call first, then the senior banker's.
// 01 — WHAT THE STATE TAKES ON, AND WHY
Most exporting countries keep a public body to take trade risks the private market will not take, or not in the size, tenor or country needed. In the UK it is UK Export Finance, a government department; in Australia, Export Finance Australia; in New Zealand, New Zealand Export Credit, which sits within the Treasury. Between them they offer insurance against an overseas buyer not paying, guarantees to banks that lend to exporters or to their buyers, guarantees behind the bonds banks issue for exporters, and in some cases direct loans.
They are meant to fill gaps. UK Export Finance describes its role as complementing the private sector, not competing with it, and Export Finance Australia's guarantees are for exporters whose bank will not lend all they need without one. For a bank, the cover is a second obligor of high quality standing behind part of the exposure. It does not replace the credit decision: the uncovered share is still the bank's, and the agency pays only on the terms of its own document.
// 02 — HOW THE COVER IS WRITTEN
A working capital guarantee is the form most mid-market lenders meet. UK Export Finance's Export Working Capital Scheme, for example, can guarantee up to 80% of a lender's risk on a facility used before and after shipment for specific export contracts, for a fee the lender pays out of the margin it earns. The parts that decide what the cover is worth:
Share covered the percentage of loss the agency bears
What counts as loss principal only, or interest and costs as well
Recoveries how money recovered after a claim is divided
Bank's obligations lend as the guarantee describes; report defaults
in time; no amendment, extension or release of
security without consent where the terms require it
Claim the waiting period, the evidence, the deadline
Cover for capital goods sold on several years' credit is also shaped by the OECD Arrangement on Officially Supported Export Credits, a gentlemen's agreement among governments, covering credits repaid over two years or more, whose participants include Australia, New Zealand and the UK. It sets the terms they may offer, such as down payments, maximum repayment periods and minimum premiums, so that they compete on the product rather than on subsidy.
// 03 — THE EXAMPLE
A firm that builds water-treatment units, constructed for this page like every figure in it, wins an overseas contract and asks its bank for a US$4m export working capital facility. On its own assessment the bank would lend US$2.5m. With an agency guarantee of 80%, the example's figure, it lends the full US$4m. The risk weights below are also the example's, chosen to show the mechanism.
Facility 4,000,000
Covered by the agency, 80% 3,200,000
Bank's own risk, 20% 800,000
Risk-weighted, limit fully drawn; borrower 100%, government 0%:
Without cover: 4,000,000 × 100% = 4,000,000
With cover: 800,000 × 100% + 3,200,000 × 0% = 800,000
The contract goes wrong and the firm fails with US$3.0m drawn. Its security realises US$0.5m, and in this example the guarantee shares recoveries in proportion to cover.
Drawn at default 3,000,000
Recovered from security − 500,000
Loss 2,500,000
Agency pays 80% −2,000,000
Bank's loss 500,000
If the claim is declined: bank's loss 2,500,000
The last line is the version a credit officer is paid to imagine. Four months before the default, the bank extended the facility's expiry and raised a sub-limit to keep the contract going, without the prior consent the guarantee required. The agency declines the claim, and the same borrower costs the bank five times as much. The breach was the bank's, not the borrower's.
// 04 — HOW IT DIFFERS FROM PRIVATE CREDIT INSURANCE
Trade credit insurance from a private insurer does a similar job for short-term receivables: it pays the exporter if an insured buyer becomes insolvent or does not pay, within buyer limits the insurer sets and can reduce. Agency cover differs in who stands behind it and how far it reaches: a government, with longer tenors, riskier countries and loans to the exporter itself, usually where private capacity or appetite has run out.
The reading differs too. Where the cover is a policy held by the exporter and assigned to the bank, or with the bank noted on it, a claim depends on the exporter having kept the policy's terms, so the bank is relying on its customer's conduct. Where the agency guarantees the bank directly, it is the bank's own conduct that the claim turns on.
DEFINED IN ONE PARAGRAPH → · RISK-WEIGHTED ASSETS, EXPLAINED → · PRE-SHIPMENT FINANCE →
// 05 — WHERE IT DECIDES A FILE
Cover changes what a bank can say yes to, not how good the borrower is. A credit paper therefore records both: the borrower's risk on the full amount, and the bank's net risk on the uncovered share, because the relationship sits on the whole loan and because a claim can fail. On capital, the Basel standardised approach lets the covered share take the guarantor's risk weight only where the guarantee is direct, explicit, irrevocable and unconditional, and the bank can pursue the guarantor promptly after a default. A bank on internal models recognises the cover instead through the guarantor's default probability or loss estimate. Each market's regulator applies its own version of those conditions, and cover whose payment turns on matters outside the bank's control may not meet them.
After approval, the file carries a second set of covenants, the agency's, and breaking one can cost the cover itself. Telling the agency about amendments, extensions, defaults and changes in security, on time and in the form it asks for, is part of managing the loan, not an administrative afterthought.
HOW BANKS READ EXPORTERS → · PRODUCT FILE: TRADE LOAN → · PRODUCT FILE: BANK GUARANTEE →
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- UK Export Finance, Export Working Capital Scheme: overview and how to apply (GOV.UK) — Partial guarantees to lenders covering up to 80% of the risk on working capital facilities, pre- and post-shipment, for a fee that is a proportion of the interest margin the lender earns from the exporter — sections 02 and the FAQ.
- Australian Government, business.gov.au — Export Finance Australia guarantees — Guarantees are given to the exporter's bank for exporters unable to secure the full amount of bank finance without additional support — section 01.
- Basel Committee on Banking Supervision, Basel Framework CRE22 (standardised approach: credit risk mitigation), paragraphs 22.23 and 22.70–22.73 — The protected portion of an exposure takes the guarantor's risk weight where the guarantee is direct, explicit, irrevocable and unconditional and the bank can pursue the guarantor in a timely manner after default — sections 03 and 05.
// QUESTIONS PEOPLE ASK
- What does an export credit agency do?
- An export credit agency is a public body that helps its country's exporters sell abroad by taking risks private lenders and insurers will not take in full. It may insure an exporter against a foreign buyer not paying, guarantee part of a bank's loan to an exporter or to its buyer, support the bonds an exporter must give, or lend directly. UK Export Finance, Export Finance Australia and New Zealand Export Credit play that role in the three markets.
- Who pays for export credit agency cover?
- It depends on the product. Under a working capital guarantee such as the UK's Export Working Capital Scheme, the lender pays the agency a fee, a share of the margin it earns from the exporter, so the exporter bears it through its interest rate. Under export insurance the exporter pays the premium. On loans to overseas buyers the premium is commonly paid by the buyer or built into the financing. The OECD Arrangement sets minimum premiums for longer-term cover.
- Does export credit agency cover mean the bank carries no risk?
- No. Cover is usually partial, so the bank keeps the uncovered share, and it pays only on the agency's terms. A claim can be reduced or declined if the bank lent outside what the guarantee describes, reported a default late, or changed the facility or the security without the consent the terms required. The bank also keeps the relationship and reputational risk on the whole loan, covered or not.
- Is the borrower still liable if the agency pays the bank?
- Yes. The guarantee protects the lender, not the borrower, and the borrower owes the full debt whatever the cover. An agency that pays a claim typically takes over the right to recover its share, either directly or through the bank, so a failing exporter can face the government as a creditor as well as its bank. The cover affects who bears the loss, not what the borrower owes.
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