The purpose of this paper is to discuss a number of issues that require attention when deciding whether a country should establish a specialized financial institution to support exports as well as what shape, form and modus operandi it should have. We discuss why any decision to establish an ECA should be made only after a careful evaluation of the impact of such an institution on both the financial and the real sector of the economy. In addition, the choice of a sustainable business model for the specialized financial institution is crucial. This paper does not seek to provide definitive answers as to whether, when and how developing countries should establish ECAs. Yet, it tilts towards extreme caution in setting up such institutions in a low-income context and highlights a range of factors that policymakers should consider in deciding whether such an institution is warranted or not.<sup>4</sup> Before discussing these factors, we analyze data from the International Union of Investment Insurers (Berne Union) on the export credit insurance industry, a spectrum of trade financing that has proven critical in the current environment. The data suggest that, although overall insurance volumes fell due to the sharp drop in trade volumes, medium to long-term insurance volumes have expanded during the crisis. Given that ECAs are dominant players in these markets, this finding indicates that public financial institutions, specialized at financing exports, have been helpful in backing longer-term credit arrangements during the crisis.

The remainder of this paper is organized as follows. Section 2 analyses data on export insurance and guarantees provided by the members of the Berne Union. It further discusses the perceived ability of publicly backed ECAs to influence the export insurance volumes during the crisis. Section 3 discusses issues that require attention when deciding whether a country should establish a specialized financial institution to finance exports. Section 4 concludes.

# **2.  Export Credit Insurance and Guarantees: Any Support from Public Agencies?**

In order to understand better why trade finance has been so high on the international policy agenda since the onset of the crisis, we begin this section by reviewing developments in volumes of trade financing during the financial crisis. Given the scarcity of comprehensive data on the subject, we largely rely on surveys conducted by, among others, the World Bank and the IMF/BAFT. In the second subsection, we analyze data on export credit insurance volumes during the financial crisis and draw some conclusions as to the role ECAs have played in alleviating shortages in this important spectrum of trade financing.

## **_Recent Trade Finance Developments_**

Statistics on trade finance volumes are generally scarce. Data available from Dialogic capturing all disclosed transactions in structured trade finance products indicate that medium to long-term finance instruments fell by about 40 percent by the last quarter of 2008. Although structured finance products only cover a fraction of the market for overall trade finance, there is additional evidence from various sources that points in the same direction. As Figure 1 illustrates, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) reports a fall of 15

> 4 The paper focuses on an ECA’s relative merits from the point of view of the country in which it is to be founded but does not address issues related to the international regulation of ECAs in detail.

3