on the position to be taken on behalf of the European Union regarding the envisaged decision of the Participants to the Arrangement on Officially Supported Export Credits

EXPLANATORY MEMORANDUM

1.Subject matter of the proposal

This proposal concerns a decision establishing the position to be taken on the European Union's behalf by the Commission in the context of the Arrangement on Officially Supported Export Credits (the ‘Arrangement’) regarding an envisaged decision to amend the Arrangement’s interest rate provisions. These provisions set the minimum Commercial Interest Reference Rates (‘CIRRs’) that apply to official financing support for export credits. The envisaged decision would harmonise practices among adherents to the Arrangement and ensure terms and conditions that reflect those of private financial markets.

2.Context of the proposal

2.1.The Arrangement on Officially Supported Export Credits

The Arrangement is a gentlemen's agreement between the EU, the US, Canada, Japan, Korea, Norway, Switzerland, Australia, New Zealand and Turkey, which aims to provide a framework for the orderly use of officially supported export credits. In practice, this means establishing a level playing field (whereby competition is based on the price and quality of the exported goods and services and not on the financial terms provided), while working to eliminate subsidies and trade distortions related to officially supported export credits. The Arrangement entered into force in April 1978, it is of indefinite duration and although it receives the administrative support of the OECD Secretariat, is not an OECD Act.

The Arrangement is subject to regular updates, taking into account financial market and policy developments affecting the provision of officially supported export credits. The Arrangement has been transposed, and hence been made legally binding in the EU by Regulation (EU) No 1233/2011 of the European Parliament and of the Council . Revisions of the terms and conditions of the Arrangement are incorporated into EU law through delegated Acts pursuant to Article 2 of this Regulation.

2.2.The Participants to the Arrangement on Officially Supported Export Credits

The European Commission represents the Union in meetings of the participants (the ‘Participants’) to the Arrangement, as well as in the written procedures for decision-making by the Participants to the Arrangement. Decisions on all amendments of the Arrangement are taken by consensus. The position of the Union is adopted by the Council and is discussed by Member States in the Council Working Group on Export Credits.

Article 63, point (a), of the Arrangement provides that "The Participants shall periodically review the system for setting CIRRs in order to ensure that the notified rates reflect current market conditions and meet the aims underlying the establishment of the rates in operation. Such reviews shall also cover the margin to be added when these rates are applied".

2.3.The envisaged act of the Participants to the Arrangement on Officially Supported Export Credits

A review of the CIRR system has been ongoing since the beginning of 2014. The CIRRs are fixed minimum interest rates that may be offered as part of a government-backed export finance contract. CIRRs are fixed for each currency of the Participants to the Arrangement. In the 127th meeting of the Participants, held in June 2014, the Participants tasked the Technical Experts to the Participants (‘TEP’) with reviewing the disciplines in the Arrangement on CIRRs.

The CIRR reform would constitute a comprehensive reform covering operational aspects (e.g. modalities such as holding and fixing the interest rates), as well as structural aspects (e.g. base rates, margins and surcharges). The aim of the CIRR reform is to harmonise lending practices among Participants and bring the CIRRs closer to market rates. The envisaged provisions on CIRRs would be applicable to all transactions, except transactions covered by the Sector Understanding for Ships and the Sector Understanding for Civil Aircraft.

At the 141st Participants’ Meeting held in June 2019, the Chair of TEP presented a draft Chair’s proposal on the CIRR reform that seeks to strike a balance between divergent interests and standpoints expressed in the course of the technical work. The Chair’s draft proposal received broad general support by the Participants, while a number of minor issues, still had to be resolved. In the November Participants’ meeting of last year, the views of the Participants converged. The Participants to the Arrangement are to adopt a decision on the draft compromise proposal by written procedure.

3.Position to be taken on the Union's behalf

The WTO Agreement on Subsidies and Countervailing Measures (‘ASCM’) provides a carve out for the Arrangement in the illustrative list of export subsidies, providing that an export credit practice which is in conformity with the provisions of the Arrangement is not considered a prohibited export subsidy prohibited by the ASCM. This means that if a WTO member is a party to the Arrangement and its export credit practice is in conformity with the Arrangement or if in practice a WTO Member applies interest rate practices in conformity with the provisions of the Arrangement, the export credit practice is not considered an export subsidy. This gives the provisions in the Arrangement on interest rates particular significance.

The provisions on the CIRRs have remain unchanged for a long time and are in need of comprehensive reform. Trade finance has become increasingly decisive in sourcing decisions in global trade and this has led to a wide range of financial products and contract structures being offered in private financial markets. To ensure conformity, the interest rates provisions of the Arrangement periodically need to be adapted to evolving market practices. The Arrangement merely outlines the general principles when providing government-backed lending at fixed interest rates and focuses on structural aspects. Since Member States provide CIRRs to a greater extent than most other Participants do and in order to converge practices within the EU, Member States have informally agreed to a set of rules that covers operational aspects of the CIRR system, as a complement to the provisions in the Arrangement. In addition to the Arrangement and the informal EU guidelines, most Member States have adopted national CIRR regulations.

The envisaged decision on the CIRR reform would provide for more detailed and comprehensive update of ANNEX XVI of the Arrangement. These would cover both the costs incurred by the lender before an export contract has been signed by a buyer (e.g. rules on minimum fees charged for offering and fixing the interest rate), as well as rules on how to calculate the interest rate, which corresponds to the yield on a government bond plus a margin covering other funding costs. By incorporating components that affect the funding costs, the CIRR reform aims to render greater coherence in the terms and the conditions offered by ECAs and thereby ensure a level playing field among Participants to the Arrangement. By doing so, the reform would narrow the scope for EU Member States to adapt the provisions of the CIRRs at national level to the specific needs of domestic industry. A transition period of two years is envisaged to allow time for export credit agencies offering direct lending to adapt to the new guidelines.

In sum, the envisaged decision on the CIRR reform involves rules on both operational and structural aspects that would provide greater policy coherence and enhance the level playing field among Participants. Therefore, it is recommended that the position of the Union is to approve the envisaged decision of the Participants to the Arrangement by written procedure to adopt new guidelines on CIRRs.