FINANCING EAST EUROPEAN IMPORTS FROM THE INDUSTRIAL WEST

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700040048-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 29
• Document Creation Date: December 20, 2016
• Document Release Date: March 30, 2006
• Sequence Number: 48
• Publication Date: December 1, 1972
• Content Type: IM

 Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Financing East European Imports
from the Industrial West
Secret
ER IM 72-165
December 1972
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
December 1972
INTELLIGENCE MEMORANDUM
FINANCING EAST EUROPEAN IMPORTS
FROM THE INDUSTRIAL WEST
1. The boom in East-West trade has brought a rapid development
of sources and methods of financing East European(s) hard currency
imparts from the industrial West. This memorandum identifies and describes
the various kinds of credit and the credit institutions involved in the trade.
Although Eastern Europe has been engaged longer and more fully in credit
dealings with the West, the analysis, except where noted, applies to the
USSR as well. The special case of Yugoslavia, which uses similar credit
facilities, is not considered.
Summary and Conclusions
2. Eastern Europe's trade with the industrial West has increased
rapidly for more than a e ,=de, and its hard currency debt has grown much
faster. Outstanding medium-term and long-term debt, almost all in hard
currency, rose from US $600 million in 1960 to about $3.3 billion in 1970,
and to more than $4 billion in 1972. The major East European debtors
are Romania, Poland, and East Germany.(2) The rise in indebtedness results
mainly from imports on credit of machinery and equipment, although
periodic purchases on medium-term credit of food and industrial materials
have added to the debt burden. Soviet indebtedness, stemming largely from
purchases of plant and equipment on credit, has grown rapidly since the
inid-1960s, when gold ceased to be the principal Soviet means of financing
hard currency deficits. At the end of 1971, the USSR owed $2 billion
on medium-term and long-term credits.
1. Bulgaria, Czechnslovakia, Hungary, East Germany, Poland, and Romania.
2. Including the East German swing debt to West Germany.
Note: This memorandum was prepared by the Office of Economic
Research.
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3. Eastern Europe's principal creditors in the industrial West are the
Soviet-owned banks, large West European commercial banks, and official
Western rediscount institutions. The Soviet banks are Eastern Europe's most
versatile creditors, performing a broad range of services (for a fee) for their
Eastern correspondents, including arranging consortium loans, handling
foreign exchange transactions, and providing non-guaranteed credit. Western
commercial banks absorb much of the westward flow of Soviet and East
European notes and bills, which are either retained in bank portfolios or
rediscounted through various outlets, including the official Western
rediscount institutions. Western "specialist" banks, centered primarily in
Vienna, Zurich, and Basel, together with the Soviet-owned banks, provide
most of the nonguaranteed suppliers' credits available to Eastern Europe.
4. At present, at least one-half of Eastern Europe's and nearly all
the USSR's medium-term and long-term debt is covered by export insurance
offered by agencies of Western governments and by the Soviet-owned
insurance company Garant in Vienna. Western countries, meeting through
the Berne Union, have helped to stabilize the competition among exporters
over credit terms granted to Eastern Europe, and the terms currently offered
by various Western systems are quite similar.
5. Financing of exports to Eastern Europe and the USSR takes the
form of suppliers', buyers', and financial credits. Suppliers' credits are
offered in the form of letter of credit facilities and "indirect non-recourse"
credits. Buyers' and financial credits take the form of clean credits, indirect
financing, and "tied" credit lines.(3) In addition, Western governments and
the Soviet Union have loaned hard currency to Eastern Europe for purposes
of refinancing, export promotion, and meeting emergency requirements for
food and other goods.
6. Except for government-backed credits covering exports of
agricultural products, the US financial community has extended only small
amounts of credit to cover exports to Eastern Europe. Until October 1972,
this was also true for exports to the USSR, but US banks are now mobilizing
substantial sums for long-term credits to the USSR. US banks do finance
a small amount of the trade on nonguaranteed medium-term credit. They
would be willing to finance some expansion of capital equipment exports
to Eastern Europe without Export-Import Bank guarantees, but much larger
credits could be financed if insured under the Export-Import Bank program.
Romania, Poland, and the USSR are currently the only CEMA countries
eligible for Export-Import Bank guarantees.
3. These and other terms used in financing international trade are explained in the
Appendix.
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7. Eastern Europe's hard currency debt is expected to continue to
rise in the years ahead. Western credits will be needed to cover planned
imports of machinery and equipment, as well as purchases of agricultural
and other goods resulting from unanticipated shortages. The USSR will also
increase its debt to help finance planned imports of capital goods and grain.
The East European countries, however, are looking to joint ventures and
cooperation arrangements to alleviate the growing burden of indebtedness
and to offset the declining growth rate of traditional exports to the West -
particularly agricultural and industrial raw materials - by providing a means
of importing capital, managerial help, and licenses while minimizing hard
currency outlays. The USSR will emphasize "self-liquidating" types of
agreement - that is, importing Western capital and know-how on credit
and repaying the credit in raw materials developed from the Western
investment.
The Roots of East European Indebtedness
8. In the 1960s, Eastern Europe's trade with the industrial West
nearly tripled. Imports were consistently greater than exports and rose
faster, and the growing trade deficits were not significantly reduced by
increased earnings on invisibles. As a result, indebtedness to the industrial
West grew to nearly six times the level in the late 1950s. In 1960,
medium-term and long-term indebtedness in the West amounted to about
$600 million; by 1970 it reached about $3.3 billion. Soviet trade with the
industrial West more than doubled during the 1960s, and hard currency
indebtedness rose from only $50 million at the end of 1959 to $1.7 billion
at the end of 1970. The ratio of East European and Soviet indebtedness
to exports (shown in the table) increased throughout th period.
9. Ratios of annual debt servicing on medium-term and long-term
credits (repayments including interest) to exports are a more meaningful
measure of debt bt.rden. Rough approximations of debt servicing in 1971
are shown below for the USSR and the East European countries:
Percent
USSR
20
Bulgaria
45
Czechoslovakia
20
East Germany
25
Hungary
20
Poland
20
Romania
35
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East European and the USSR Exports and Medium-Term
and Long-Term Debt in the Industrial West
Million US $
Debt as
Million US $
Debt as
Percent
Percent
Exports
Debta
of Exports
Exports
Debta
of Exports
Bulgaria
68
100
147
260
400b
154
Czechoslovakia
309
20
6
746
400
54
East Germany
420?
200d
48
904c
600d
66
Hungary
185
30
16
634
400e
63
Poland
374
250
67
962
650c f
68
Romania
146
20
14
550
900
164
Total
1,502
620
41
4,056
3,350
83
USSR
739
136
18
2,196
1,694
77
a. The Bulgarian 1960 debt figure is confirmed by documentary sources. The other debt
figures, for Bulgaria as well as for Hungary, Poland, Romania, and the USSR, have been
derived in various published CIA balance-of-payments studies. Those for Czechoslovakia
are based on unpublished balance-of-payments estimates. The i960 and 1970 estimates
for East Germany are rough approximations based on trade balances and fragmentary
data on invisibles earnings for the period 1950-60.
b. In providing debt relief to Bulgaria in 1969,the Soviet Union refinanced a portion of
Bulgaria's debt through the Soviet banks in the West, reducing repayments pressures but
not the level of overall indebtedness.
Including trade with West Germany.
d. Including the East German swing deficit with West Germany.
e. Rounded to the nearest $50 million.
f. Excluding amounts owed on PL-480 credits; some $400 million remained as of
January 1972.
Romania and Bulgaria carry the highest debt servicing ratios. Romania's
debt burden has been relieved somewhat by West German and French
rescheduling and fairly rapid growth of exports to the West. Bulgaria, on
the other hand, has had little success in boosting exports and has had to
rely on Soviet assistance to avoid default. Czechoslovakia and East Germany
show relatively high ratios in part because most of their indebtedness is
medium term, and because the growth of exports has slowed down. The
other countries face less severe repayments pressures, and all have managed
rapid growth in exports to the West in recent years.
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10. East European indebtedness has continued to rise in 1971-72 by
several hundred million dollars. In addition, the dollar equivalent of the
debt was raised by more than 10% because a good deal of it is in West
German marks, French francs, and other currencies that appreciated in
relation to the dollar in 1971. Present indebtedness in 1972 dollars is more
than $4 billion.
11. Most of Eastern Europe's outstanding indebtedness can be traced
to purchases of several billion dollars worth of Western machinery and
equipment - chemical and petrochemical equipment, motor vehicle
manufacturing facilities, metalworking and metallurgical equipment, and
ships and marine equipment. Poland, Czechoslovakia, and Romania have
been the leading importers of Western machinery, followed by Bulgaria and
Hungary. East Germany has relied least on Western imports, although
machinery imports have been growing very rapidly since the mid-1960s,
especially from West Germany via interzonal trade.
12. Another major outlay contributing to the rise in indebtedness in
the 1960s was for purchases of grain (wheat and corn), mainly in 1963-66
following poor grain harvests in both Eastern Europe and the USSR. In
those years, Eastern Europe imported about $850 million worth of wheat
and corn from industrial Western countries, much of it on medium-term
credit from Western Europe and Canada, with the remainder paid for by
the USSR. Eastern Europe has also bought industrial materials and even
food on medium-term credit.
13. In 1960, early in the expansion of imports on medium-term and
long-term credit, Poland and East Germany were the countries most heavily
indebted. Bulgaria, however, was in the most difficult position; the ratio
of its indebtedness to exports was already 1.5:1. Hungary had been in
trouble in the mid-1950s, but after the 1956 revolt, the Soviet Union had
paid off most of its debts (roughly $150 million) by selling gold through
its Paris-based bank - the Banque Commerciale pour 1'Europe du Nord
(Eurobank). Romania and Czechoslovakia were only ~'ightly involved in
financial dealings with the West in 1960.
14. Since the early 1960s the greatest change has been in the position
of Romania. Its hard currency debt has risen to 45 times the 1960 level,
while trade with the industrial West has increased just over four times and
imports only five times. Romanian medium-term and long-term indebtedness
was still quite low in 1965 (at $215 million) but grew to $700 million
by 1968 and to $1 billion by 1971. Because Romania would seek Soviet
assistance only as a last resort, it is now in the weakest financial position
of any of the East European countries, even though it does have gold stocks
estimated at $125 million. A small hard currency loan from the People's
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Republic of China in 1971 nd debt
refinancing assistance from West Germany and France in 1969-71 barely
enabled Romania to hold its own in the face of heavy debt serv;cing
requirements.
15. Bulgaria has been in hard currency trouble off and on from having
overestimated its ability to increase exports to Western Europe. Its ratio
of debt to exports remains one of the highest in Eastern Europe, about
1.5:1. The Soviet Union bailed Bulgaria out of insolvency in the early 1960s
and again in 1969 and still seems unable to control Bulgarian hard currency
spending.
16. The debts of the other countries continue to run at less than
the value of their exports. Poland, with the greatest volume of trade with
the West, has the largest debt, if PL-48C) credits are included. Polish policy
on incurring hard currency indebtedness remained very conservative until
the late 1960s, when purchases on credit began to rise sharply. Beginning
in 1971, purchases on credit have been large, and the Gierek regime expects
to rely heavily on credits to support economic expansion through the 1970s.
17. East Germany also was conservative in buying on credit from the
West until the late 1960s, when indebtedness began to increase rapidly,
almost all on medium term. The swing debt(4) owed to West Germany
has increased, amounting to about $180 million at present. In addition,
East Germany has drawn a sizable amount of credit for plant and equipment
from West Germany guaranteed by a Wes; German government agency. fhe
regime has been able to get medium-term credit elsewhere In the West,
especially from Swiss and American banks and from the Soviet-owned banks.
Banking and commercial interests in Japan, France, and the United Kingdom
also have begun to offer East Germany substantial credit facilities.
18. Czechoslovakia and Hungary have increased their indebtedness
rapidly since the early 1960s, but from a very low level. Czechoslovakia
has been fairly careful, althcugh not very skillful, in respect to buying on
credit. Medium-term credits bulk rziher large in Czechoslovakia's
indebtedness.
19. Hungary, with the most adept bankers and perhaps the most
consistent and prudent economic policy, maintained by far the lowest rate
of debt to exports until 1969 - the second year of the economic reform --
when the regime began drawing extensively on medium-term Eurodollar
credits. By the end of 1970, Hungary's medium-term and long-term debt
amounted to about $400 million. In 1971, Hungary ran a huge deficit with
4. The swing credits are interest free and apparently are indefinite in maturity.
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the West, stemming from large imports of machinery combined with an
unexpectedly sharp drop in earnings from exports of raw materials and
semimanufactures. As a result, Hungary's debt to the West increased to
ac least $500 million, bringing tightened economic controls at home and
drawing criticism from the Soviets. The Hungarian trade balance with the
West is still negative, but the import surplus so far in 1972 is substantially
less than that in 1971.
20. Through the nid-i960s, the USSR relied primarily on gold sales
to finance its deficit. Thus, during 1960-65, Soviet gold sales averaged more
than $370 million per year. Western crt3its - principally medium-term -
played a relatively small role. Dwindling Soviet gold reserves and the
availability of Western credit facilities with maturities in excess of five years
resulted in increased Soviet use of Western long-term credits, which replaced
gold sales as tae chief element in financing the Soviet deficit with the West.
The low level of its outstanding debt at the end of 1965 of less than $400
million reflected the generally shorter terms which had been available in
the first half of the 1960s. In contrast, during 1966-71 the USSR drew
down about $3.2 billion in Western medium-te.?m and long-term credits with
an average maturity of about eight years, anc,' at the end of 1971 had an
outstanding debt of more than $2 billion. Most of these drawings have
been in support of imports of plants and equipment for the chemical,
petrochemical, and automotive industries.
Eastern Europe's Creditors
21. The institutions that pioneered the financing of East-West trade
were the two Soviet-owned banks in London and Paris, the Moscow Narodny
Bank (MNB) and the Banque Commerciale pour 1'Europe du Nord
(Eurobank). Although the rapid expansion of other credit sources has
reduced their importance, the Soviet banks remain Eastern Europe's largest
single creditors in the West. While these banks also finance some Soviet
imports, the USSR generally has been a net creditor to its own banks in
the West.
22. Most of the financing of East European imports from the
industrial West, however, is now done through large commercial banks in
West Germany, France, the United Kingdom, Austria, Italy, and Switzerland.
Probably fewer than 50 banks in these countries handle a large share of
the financing of exports to Eastern Europe. Banks in London, Paris, Zurich,
Rome, Milan, Vienna, and Frankfurt are the leaders in this business. The
commercial banks, however, are often not the ultimate holders of East
European paper (trade bills and promissory notes). Most countries have
state-supported institutions that rediscount a portion of guaranteed paper
to facilitate commercial bank liquidity and thus help promote exports. The
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extent to which East European paper is spread around among banks,
rediscount institutions, and commercial and private investment portfolios
differs considerably from country to country. Nonguaranteed paper is
handled - and held - by specialized banks with access to "high-risk"
investment funds. The Soviet-owned banks discussed below deal in all types
of East European paper.
Soviet-Owned Banks in the West
23. In addition to the MNB in London, its branches in Beirut and
Singapore, and Eurobank, the USSR owns the Wozchod Handelsbank A.G.
in Zurich and the 01st-West Handelsbank in Frankfurt. The East European
countries as a whole owe at least $600 million in hard currency to these
banks - primarily MNB and Eurobank. These banks have been more than
just creditors; they have encouraged Western lending to Eastern Europe,
especially in the years before Western confidence in Eastern banks was
established. The Soviet banks were for a long time the only ones the East
Europeans would trust to carry on foreign exchange transactions for them.
They were the initial founders of - and remain the principal dealers in -
the discount market for East European non-guaranteed notes and bills.
24. In addition, the Soviet banks' policies regarding East European
payment of maturing obligations are in some cases more liberal than those
of most other Western banks. In fact, it is practically impossible for an
East European bank actually to be in default to a Soviet creditor-bank,
given the Soviet government's desire to preserve the credit rating of its
client states. As an example of extreme banking practices, short-term credits
granted in 1959 and 1960 to Bulgaria by both MNB and Eurobank were
refinances!., or "rolled over" again and again because of Bulgaria's inability
to meet repayments, finally becoming long-term loans spanning seven years.
ey also
finance trade at reasonable interest rates for East European countries at
times when they have run up against ceilings set by Western governments -
and commercial banks - on hard currency credits.
25. The most important Western-owned institutions involved in
financing East European imports are the large West European commercial
banks. These banks not only finance a considerable share of exports to
Eastern Europe but also serve as primary buyers of paper that ultimately
is rediscounted with government-operated rediscount organizations or sold
through other outlets. Thus most of the East European short-term,
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medium-term, and long-term paper at least passes through commercial banks,
and their policies and practices are an important determinant of the amount
and type of credit available to Eastern Europe.
26. The West European banks most involved in financing exports
to Eastern Europe include the Deutsche Bank, Bank fur Gemeinwirtschaft,
and Dresdner Bank, all centered in Frankfurt; the Commerzbank of
Dusseldorf; Lloyds Bank, Banker Trust Co., Barclays Bank, Midland Bank,
and National Westminister, all of London; Credit Lyonnais, Credit
Commerciale de France, and Societe Generale, all of Paris; the Union Bank
of Switzerland and Credit Suisse of Zurich; Swiss Bank Corporation of Basel;
Banca Commerciale Italiana and Credito Italiano of Milan; Banca Nationale
del Lavoro and Banca d'Italia, both of Rome; and Creditanstalt- Ban kverein
and Breisach and Schoeller Batik, both of Vienna. More than 20 other banks
in Western Europe are quite active in East-West financing, but the above
21 banks have pretty much dominated the field.
Specialist Banks and Other Non-Recourse Creditors
27. In some East European countries, the need for credit has
frequently exceeded that available under the various guarantee systems in
Western Europe. As a consequence, sources of non-guaranteed suppliers'
credit have developed as the demand by exporters for financing has
increased. The biggest customers of goods financed in this makeshift
non-recourse market have traditionally been Bulgaria and Romania, although
exports to Poland, Czechoslovakia, and East Germany sometimes have been
financed in the same way. The USSR has done very little borrowing in
the non-recourse market.
28. The principal suppliers of non-recourse credit, are the Soviet
banks -- MNB, Eurobank (on a smaller scale), and Wozchod Handelsbank
A.G. Moreover, the high interest rates obtainable in the non-recourse market
have spawned a growing number of finance companies or specialist banks,
as they are called in Europe. These banks have been set up frequently by
major commercial banks using high-risk funds, specifically to discount
non-guaranteed medium-term and long-term promissory notes drawn on East
European firms or trade organizations and guaranteed only by East
European banks. The leading specialist banks are European Finance of Milan;
Monaval Finance Ltd., Bank fur Handel and Effekten, Noreco Finance,
Ufitec International, and Finance Ltd., all of Zurich; and Sofigest Societe
Financiere of Geneva. In addition, several of the leading commercial banks,
mainly in Zurich, Basel, and Vienna, have established separate departments
that are actively engaged in non-recourse financing.
29. The formation of Noreco Finance, listed above as a specialist
bank, offers one example of indirect commercial bank participation in the
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non-recourse market. Noreco was established recently by the Dow Bank
in Zurich together with the Lavoro Bank and three other European banks,
with the purpose of sharing in the high profits earned in discounting and
rediscounting non-guaranteed notes from Eastern Europe as well as certain
less developed countries. In the short time it has been in existence, Noreco
has become one of the largest dealers in East European paper in Zurich.
Western Guarantee and Credit Systems
30. The dramatic growth in exports of capital equipment to Eastern
Europe on credit in the middle and late 1960s put considerable pressure
on the West European financial community to provide low-cost
medium-term and long-term credit amounting to several billion dollars. The
most effective means of raising and securing such large sums of hard
currency has been through official credit facilities and export-guarantee
insurance. The Soviet insurance company Garant (Garant-Versicherungs AG)
in Vienna, which writes a wide variety of insurance, took the lead in
guaranteeing credits for Eastern Europe, a role parallel to that of the Soviet
banks in arranging for credits. Garan+ has continued to play a considerable
role in this field. In recent years it has been especially active in guaranteeing
credits by Austrian and Swiss banks for West German exports to East
Germany and Czechoslovakia, perhaps involving as much as $100 million
a year in new credits. In 1968, Garant became very sticky about
guaranteeing additional credits for Bulgaria and Romania (and Yugoslavia),
countries that are not as good risks.
31. The greater part of the export guarantees in East-West trade are
now being furnished by instrumentalities of Western governments, which
normally are limited to guaranteeing exports of domestic origin. All of
Eastern Europe's principal Western trading partners have such facilities for
insuring - and for financing - exports, and most such facilities have been
made available for exports to Eastern Europe. Commercial bank financing
of exports of machinery and other manufactures frequently will require
the issuance by an export credit insurance institution of a policy providing
protection against commercial and non-commercial (political, monetary, and
catL,,rophe) risks. An insurance policy is issued in favor of the exporter
and assigned by him to the institution that finances the credit, to serve
as collateral for the credit. Presently, at least one-half of Eastern Europe's
and nearly all of the USSR's outstanding drawings on medium-term and
long-term credit are covered by insurance.
32. In the early 1960s, Western competition for East European
equipment orders began to shift toward credit terms and away from product
specification, price, and service. West European countries made great efforts
to compete with their neighbors by offering longer and longer credit terms
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and/or lower interest rates, and the East European countries had a big hand
in promoting this competition by playing various countries against one
another to gain more favorable terms.
33. Quickly recognizing that such competition was not desirable,
representatives of Western governments used regular meetings of the Berne
Union to discuss export credit terms and to try to agree on voluntary limits,
to be enforced through the government-controlled credit insurance
organizations. Until the early 1960s, none of the members of the Berne
Union insured credits with repayments running more than five years.
Gradually, however, the competition for sales to Eastern Europe stretched
the term, to an average of seven to eight years for large purchases and
as long as 10 years or more for special cases. The generally accepted credit
periods applicable to specific types of equipment or to a specific value
of a contract have likewise been extended.
34. Competition among governments has streamlined the operation
of the financing and insurance schemes throughout Western Europe,
minimizing costs of premiums and interest rates, increasing the speed with
which tentative and final approvals of requests for insurance or financing
are given, and reducing the downpayment required from the purchaser at
time of delivery as well as the amount of uninsured credit that must be
financed outside the export credit system. Moreover, the terms of
guaranteed credit offered to East European importers largely have been
unified among principal creditor countries. All systems offer medium-term
and long-term guaranteed credit at interest rates ranging from about 6%
upward to 9% and covering between 80% and 90% of the contract price.
Most systems provide for official or quasi-official refinancing of guaranteed
paper, and ali of the systems are large and deep enough to support credit
financing to the East European countries well beyond the limits established
for those countries.
35. Although terms are similar, institutions vary. In the United
Kingdom, for example, the financing of credits covering exports of capital
goods and related categories to Eastern Europe is carried out as part of
regular banking business, mainly by the London clearing banks and some
of the merchant banks. The Export Credits Guarantee Department of the
Board of Trade provides export credit insurance. Interest rates on credits
are currently running at a rate of 6%. The Bank of England has established
partial refinancing facilities to cover guaranteed credits of two years or more.
36. In West Germany, the two organizations that normally finance
export credits covering capital goods and related manufactures - the
Ausfuhrkredit-Gesellschaft MbH and the Kreditanstalt fur Wiederaufbau -
are only barely involved in financing exports to Eastern Europe. Most credit
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financing of this type is through the West German commercial banks, such
as the Deutsche Bank AG, centered in Frankfurt. A fairly large portion
of the credits is insured by the I-Irmes-Kreditversicherungs AG, the official
export insurance organization.(5) Interest rates on new credits at the end
of 1971 were averaging about 8% to 8.5%, although there are some
exceptions (apparently reflecting interest rate subsidies) in the 6% to 7%
range.
37. French exporters can extend suppliers' credits to East European
importers through the French deposit and investment banks. Buyers' credits
with a minimum maturity of eight years and involving minimum sums of
25 million francs are also financed through these two types of banks in
cooperation with the Banque Fiancaise du Commeice Exterieur (BFCE).
Medium-term (defined as two to five years in Francs) and long-term
suppliers' credits are refinanced by the Credit National, which in turn
rediscounts them with the Banque de France. For buyers' credits, the
deposit and investment banks rediscount with the Banque de France the
portion whose maturities do not exceed five years. The portion over five
years is granted by the BFCE, which keeps such paper in its portfolio.
38. French credit institutions also grant financial credits to East
European importers to cover down payments and ancillary costs under
French contracts. French export insurance is provided by the Compagnie
Francaise d'Assurance pour le Commerce Exterieur (COFACE). Interest
rates in late 1971 were running about 6.1% to 6.8% on French-guaranteed
credit.
39. West German export insurance premiums are quite modest and
do not vary according to the credit rating of tl' importer or exporter.
This gives German exporters some advantage over French and British
exporters, who pay higher premiums and at differentiated rates. However,
the total cost of credit has, for a number of years, been considerably higher
in West Germany than in the United Kingdom or France, or in most other
industrial Western countries for that matter. Furthermore, a much larger
share of French and British capital goods exports to Eastern Europe has
been financed through official financing agencies than has been the case
in West Germany.(6) In all three countries, a large portion of credits covering
machinery and equipment sales to Eastern Europe has been insured against
political and commercial risks.
5. In addition, West Germany in 1967 set up a special institution for financing plant
and equipment sales to East Germany, called Gesellschaft zur Finanzierung von
lndustrieanlagen MbH (GEFI), because East Germany, not being a "foreign country"
was ineligible for Hermes export insurance.
6. A considerable part of West German exports to Eastern Europe has been financed
by Austrian and Swiss banks, apparently insured in part by Garant.
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Types of Credit
40. Export credits take two basic forms - suppliers' credits and
buyers' credits. Suppliers' credits are granted by suppliers, usually through
commercial banks, to foreign buyers on a short-term basis (credits of one
year or less from delivery), a medium-term basis (credits of one year to
five years), or a long-term bas:s (credits of between five and 10 years from
delivery). Buyers' credits are granted directly by banks or other credit
institutions to foreign buyers, enabling them to pay cash to suppliers for
imports. Credits of a third type called "financial credits" are granted directly
to East European banks as general-purpose loans.
41. As shown in Figure 1, credits granted to East European importers
from Western sources are a mixture of short-term, medium-term, and
long-term suppliers', buyers', and financial credits. The repayment period
is determined largely by the category of goods involved, although the credits
covering sales to Eastern Europe sometimes run longer than i; terms
specified in the Berne Union understanding. Sales of consumer goods and
raw materials generally are financed over one year or less. Durable consumer
goods and industrial inputs (for example, chemicals) are financed over two
years or less; light capital goods such as agricultural machinery, large
commercial motor vehicles, lathes, and generators over three to four years;
and heavy capital goods over five years or longer. Sales of agricultural
products normally are financed over less than 18 months except for US
Commodity Corporation Credits (CCC) and Canadian government
guaranteed credits which carry three-year terms. Most import financing for
tf.e USSR involves medium-term and long-term credits.
Tied Lines
of
Financial Credit
Western Credit Available to Ea;atern Europe
Government
Guaranteed
Documentary
Suppliers' Credit
Non-Guaranteed
Documentary
Suppliers' Credit
Official Western
Refinancing
Credit
Proceeds from
Bond Issues
Soviet Hard Non-Recourse
Non-Guaranteed
Currency Credit Buyers' and
Suppliers' Credit
Single-Source Consortium Financial Credits
Clean Deposit Clean Deposit from
Financial Credits Financial Credits CEMA Banks
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Suppliers' Credits
42. Suppliers' credits take two principal forms: documentary or
"clean" letter of credit financing, and "indirect" non-recourse financing.
Di wings on ;suppliers' credits account for the largest part of Eastern
Europe's outstanding indebtedness.
Documentary Letters of Credit
43. Under the terr,is of these credits, Western banks will open letters
of credit at the request of East European banits in favor of exporters to
cover shipments to Eastern Europe. The terms of a short-term latter of
credit will usually specify that bills of exchange are to be drawn by the
exporter against the East European importer. These bills generally must
be guaranteed by the importer's bank and accompanied by the appropriate
trade documentation - bills of lading, insurance forms, invoices, and so
on - at such time as they are presented to the exporter's bank for
discounting after shipment of the goods. Once bills are discounted by a
bank, the exporter has his money and he is finished with the transaction.
The bank, however, ~ `ill has options (see Figure 2). It can either hold the
bills until t;:ay mature, at which time it can demand payment from the
importer, or it can stamp the bills "accepted" whereupon it accepts full
responsibility for ultimate payment of the bills at maturity, and the bills
become bank acceptances that can be rediscounted on the acceptance
market. In some cases, banks can also rediscount short-term guar:inteed bills
with state-operated refinancing institutions, provided that the terms of the
contract and the type of goods involved conform to the standards set forth
by the guarantee system. Under clean letters of credit, Western banks do
not require that trade documents, which serve as collateral, accompany bills
when presented for discounting.
44. Whether or not East European bills of exchange are rediscounted
by Western banks depends upon the issuing banks' practic,s. The Moscow
Narodny Bank - one of the most active in the acceptance market -
discounts East European bills for British and other Western exporters under
lines of credit established with each of the six East European banks. MNR
then rediscounts (sells) a portion of the bills as acceptances in the London
acceptance market. MNB also is active in buying (also called rediscounting)
bills from other Western banks. MNB's turnover in this business amounts
to several hundred million dollars annually.
45. In the case of some of the large West German commercial banks,
bills discounted for exporters, again under lines of credit extended to East
European banks, are frequently not rediscounted in West German financial
markets. The banks hold the paper until maturity and collect payment frnm
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Figure 2
Medium-Term and Long-Term Suppliers' Guaranteed Financing
Western ' ?' "?'
_ Shipment aI & d.
Pramiuory NMil-SUU Bank Guar.ntu Trade Organization
1 Ildetlon
F LCammhm.nt Western
Au'nlicetlon on _ Guarantee
I_ Iniunnrn ~blk~
I j Proeudt of
I bin (.n Service Chary.
i Innurence Policy
Prom.iory Nota-SUte iea OumMee
Organization
Importing Firm
or
Slott Bonk
Importer's . Guarantee
Bank
Proceed. Official
from A.diecountlnp
Exporter's Ineurence_Potty Rediscount
Bank Prcraaor Nolu-- Slit Oink Quorut.. Facility or
~- - Other Outlet
East European banks. Banks elsewhere in Western Europe may hold some
paper until maturity, but also sell paper in the market when possible.
46. Medium-term and long-term letter-of-credit financing requires
promissory notes and periodic payment or amortization. Whereas bills in
short-term transactions are drawn by exporters against East European
importers, promissor' notes are issued by East European importers. Each
note is guaranteed by the official East European guarantor bank - each
guarantee being numbered serially. Separate notes are issued for each
payment (usually semiannual) required under the terms of a credit, with
interest at a specified rate uf!'ally included in the face amount of each
note. Thus each note becomes a separate negotiable instrument which can
be discounted and rediscounted in European money markets or, in the c,.se
of insured notes, within an official refinancing system.
47. At present, a large s'iar,' of outstanding East European
medium-term and long-term promissory notes have been guaranteed under
the various West European insurance schemes. The amount of insured
medium-term and long-term credits available to a particular East European
country is specified by the credit insurance organizations. Country limits,
which indicate the maximum value of guarantees that can be approved,
have been established for each East European country. When the limit is
reached, as has frequently been the case for Bulgaria and Romania, credit
insurance is no longer available, and import financing becomes more
expensive and m,;e difficult to arrange.
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Indirect Non-Recourse Financing
48, When expo' t insurance is not available to cover East European
promissory notes. official rediscounting organizations cannot accept these
notes, commercial banks are reluctant to do so, and West,?rn exporters must
look to other sources of hard currency in financial markets that are willing
to discount such paper. When in need of such credit, Western exporters
appeal to their commercial banks to tap the major suppliers of non-recourse
funds. This form of credit, known as indirect non-recourse financing, is
so named because, in contrast to letter-of-credit financing, the credit is
provided in a circuitous fashion with no direct link between the discounting
institution and the East European buyer (see Figure 3). Until the
mid-1960s, the only significant outlets for non-guaranteed notes were the
Soviet banks. These banks were willing to buy up limited amounts of
medium-term paper at premium discount rates.
49. Beginning in the mid-1960s, when East European imports of
.capital equipment began to grow ,rapidly, the demand for Western
non-recourse financing increased, and the specialist banks began to appear,
enlarging the market and increasing outlets for East European notes. The
growth of this market enabled some of the East European countries,
especially Romania and Bulgaria, to impo:.t more capital equipment in a
shorter time period, while going deeper into debt at a higher cost.
50. Eastern Europe currently owes at least $300 million to $400
million in outstanding non-guaranteed medium-term and long-term paper.
As with the market for guaranteed notes, the non-recourse market has its
lending limits. The specialist banks are quick to shut off the credit flow
if they sense that an East European country is becoming overextended.
Rising discount rates quoted for a country's notes signal weakening
confidence in that country's hard currency position. The discount rates
range from 6% upward to about 13^'x, depending on contract rates. Steeper
rates have been applied to both Bulgarian and Romanian paper, as both
countries are frequently in hard currency payments difficulties. The lower
rates apply to countries with high credit ratings - Poland, Czechoslovakia,
and East Germany. Hungary has not found it necessary to finance imports
in this fashion.
Buyers' and Financial Credits
51. Buyers' and financial credits are a somewhat less important, but
growing, i orm of financing available to Eastern Europe. Buyers' credits take
the form of indirect financing granted to specific importers. Financial credits
are clean deposit credits, extended to banks from single sources as well
as consortiums, and tied lines of credit.
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Medium-Term and Long-Term Suppliers' and Buyers' Non-Guaranteed Financing
E
Western Application r~,,,Shianaot*ra~
t of Goods
Guarantee Application Reiected , Western Exporter - Dawnoavmem
RegeV to Arrange Fomncla
Exporter's
Proceeds from Discounting Less Service Charges
Promissa Notes-State Bank Guarantee
_ Offer of Promissory Rates
Promissory Notes-State Bank GuaranteeCommemmnt Fee
Proceeds from Discount of Notes
Note: In the example the East European importer has arranged for 100% financing.
The downpayment is financed through the knporting country's foreign trade bank
which issues the importer's notes to a specialist bank in return for downpayment funds
Fslanemg for the bulk of the contract (00%-9f b) is arranged on a non-recocrse
basis by the exporter's bank with the same specialist bank. The latter rediscounts both
sets of notes to other specialist banks In the non-recourse market.
Importing Firm
or
Trade Organization
t 1
' ' R~c~ f~0 ~g,-
Slats Bank Guarawn ( (
Importer's Inds far Uawnuanant. Bank
Pramd~mrC Rates to Coverer Dawnment Fib
__ (
Offer of Promissory Notes to Cover Oo
_--- E__
wnp
w
AcceP! a-Pr _a:nrY.& SSUQ.Bi d gwft
Proceeds from Discount of Notes
II. - - Offer o Prammiss , Noted - w.0-
- 1L__ptaLe-Pro isso tlof s-Stase wn c uaraMee
Proceeds from hedscoum Operation --
Other
Speciaii t Banks
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Clean Deposit Financial Credits
52. All major European banks solicit deposits from banks and other
sources as a means of building up business and maintaining good relations
with correspondents. For East European banks operating in soft currency
economies, there are no domestic hard currency deposit funds. East
European banks solicit funds by offering interest earnings competitive with
prevailing Eurocurrency rates, for terms ranging from a few days up to
six months or even longer. Eastern Europe's best sources of hard currency
deposits are, as might be expected, the Soviet banks in the West. Eurobank,
MNB, and Wozchz)d Handelsbank, in that order, provide most of these hard
currency deposits, usually on a short-term basis, but occasionally for periods
of up to two years. At the same time, ro':ghly one-half of the deposits
of the Soviet-owned banks originate from non-Communist countries.
53. Clean deposits are the cheapest form of hard currency credit
Eastern Europe can get. Even though such deposits are at market rates,
they have the added advantage of flexibility over documentary credits. Such
credit can be put to almost any use, provided that the funds for repayment,
including interest, are available at the end of the deposit period in the
appropriate currency - not always an easy task for banks operating on
a hard currency shoestring.
54. Until the late 1960s, East European banks were net creditors in
the Eurodollar market, but in the last few years they have begun to enter
the Eurodollar market as short-term debtors on a rather large scale. At
the end of 1971, they ran a deficit of roughly $600 million, compared
with only about $60 million at the end of 1969. It is possible that Hungary,
one of the East European pioneers in Eurodollar speculation, has amassed
a large short-term deposit deficit in Eurodollars or other Eurocurrencies
to cover its unprecedented trade deficit with the West in 1971. The USSR
seems to have remained a net creditor in the Eurodollar market.
55. The other form of clean deposit credit is the so-called Eurodollar
loan. Eurodollar loans are clean deposit financial credits extended to East
European banks by groups or consortiums of Western commercial banks.
These credits are typically extended for four to five years at interest rates
ranging from 0.75% to just less than 2% over the rate earned on six-month
Eurodollar deposits. Eurodollar loans are not connected with any of the
federal credit systems, nor are they guaranteed under those systems. The
creditors are large Western commercial banks, generally in Europe, although
occasionally US and Japanese banks also participate.
56. Eurodollar loans are not tied to the purchase of specific goods,
although an East European bank may solicit such a loan, specifying that
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the proceeds will be put to a cert',:. use. Hungary has rain-_d $120 million
(excluding Eurobond issues) in- medium-term credit on the Eurodollar
market, including loans of $15 million and $30 million that were supposedly
earmarked for development of the aluminum and pharmaceuticals industries,
respectively. Shortly after the $30 million credit was extended, Hungary
announced that the proceeds of the loan were needed for other purposes,
doubtless to take care of repayments falling due. When asked about the
apparent misrepresentation by the Hungarian National Bank, one of the
bankers heading the consortium stated that it did not matter to the creditors
which $30 million Hungary spent on developing pharmaceuticals so long
as an equivalent amount of hard currency was used for that purpose within
a reasonable period of time. The apparent ease with which funds are raised
and the relaxed attitude on the part of creditors have been characteristic:
of the East European experience with this market. The East European
countries have obtained about $500 million in rnedium-term credit on the
Eurodollar market since the late 1960s.
57. An East European country planning to ;raise Eurodollars through
a consortium will usually enlist the aid of a "jobber" (frequently one of
the Soviet banks in the West) to feel out the market. He determines
availability and cost of funds as well as the appropriate number of lenders
("factors") to participate in a particular transaction. A decision is usually
made to determine whether and/or when to publicize the transaction. Some
East European banks prefer to borrow Eurodollars on a confidential basis,
especially when they are using the loan to repay earlier loans. Other banks
in certain circumstances wish the publicity associated with a loan held up
until all of the details are worked out and the transaction is completed.
When the news is not closely held, by error or design, the Western media
are always quick to pick up word of an impending Fur dollar loan to
Eastern Europe. Considerable publicity has been attached to Hungary's
Eurodollar borrowing as well as 'o recent loans extended to CEMA's
International Bank for Economic Cooperation, which has borrowed $140
million to be repaid over a five-year period from three different West
European banking consortiums. However, all of the East European countries,
with the possible exception of Czechoslovakia, have borrowed Eurodollars
from Western consortia.
Indirect Buyers' Credits
58. Although mosc of the indirect financing of East Eur-)r'ean imports
is in the form of non-recourse suppliers' credits, occasionally East European
importers can raise hard currency to cover downpayments on sizable
contracts or to meet repayments on other obligations by issuing promissory
notes to one of the specialist banks in Vienna or Zurich, generally on terms
of three to four years at rather high rates of interest. Outstanding obligations
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of this type probably do not exceed $30 million to $40 milli m at any
one time, again with Bulgaria and Romania being the biggest customers.
Lines of Tied Financial Credits
59. Tied financial credits are granted for promotion it purposes by
Western producers, exporters or banks. The credit lines are tied in that
the credits can only be drawn down by purchasing certain types of products
in the country extending the loan. West European countries frequently
extend credit lines of this type to kick off new trade agreements or for
other promotional motives. The most recent examples of this type of credit
are a $200 million line of credit recently extended fly Japanese businesses
to the Polish foreign trade bank to be used for purchases of Japanese capital
equipment, and a $500 million British credit granted to the USSR to
promote UK exports of equipment.
Government-to-Government Loans
60. Western governments occasionally lend money to East European
governments for purposes of debt rescheduling, to promote exports, and
for various other economic and political reasons. West Germany has been
most active in extending credit for refinancing outstanding debts, notably
in lending about $100 million to Romania in 1969 and 1970 to cover debt
rescheduling. The Chinese government extended a $40 million clean deposit
credit to Romania -n the fall of 1971 as a part of a trade and cooperation
agreement.
61. The United States extended $538 million under PL-480 credits
to cover shipments of agricultural products to Poland in 1957-64. The
United States also has extended Mutual Security Act loans to Poland
amounting to $61 million. US Commodity Credit Corporation (CCC) loans
in 1963-71 to Poland, Romania, and Hungary amount to roughly $250
million, and a $500 million line of credit was opened for the USSR in
1972.
62. The Soviet Union has extended a considerable number of so-called
emergency hard currency loans to Eastern Europe, the most recent of which
was a $100 million loan to Poland to cover meat purchases in the West
in 1971-72. As stated above, the Soviets have used their banks in London
and Paris to advance these "special" hard currency loans to Eastern Europe.
63. The terms of repayment of government-to-government loans are
typically softer than with standard commercial credit. West German
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refinancing of credits to Romania allows for grace periods, ballooning
payments, and reduced interest rates. Most drawings on US PL-480 credits
are being repaid by Poland in Polish zlotys, which have been used by the
United States to finance cultural, scientific, and medical projects in Poland.
US CCC credits covering exports of agricultural products allow for
repayments over three years, whereas such goods are generally financed on
terms of one year or less if purchased from private sources. Soviet hard
currency credits to Eastern Europe in past years often have either been
written off or perhaps repaid in goods it low interest. More recently,
however, the Soviets have supplied hard ci., ency to Eastern Europe merely
by making credit lines available at the Soviet banks in the West over fairly
short time periods and at commercial interest rates.
Eurobonds
64. In June 1971, Hungary became the first East European country
to raise hard currency through a bond issue -- $25 million worth with
maturities of 10 years. The float was carefully orcher rated by MNB.
Subscribers were lined up in advance so that when the issue hit the market
it was oversubscribed at once. The bonds carry interest of 8.75% and were
sold at 99% of par value. Hungary is currently floating bonds worth an
additional $50 million on the Eurodollar market. The demonstration effect
of these bond floats in terms of the borrowing potential for all of the
CEMA countries is at least as important as the $75 million proceeds are
to Hungary, which has already raised about $150 million on the Eurodollar
market in medium-term loans. There has been speculation in financial circles
that CEMA's International Investment Bank will shortly enter the Eurobond
market to raise funds for CEMA joint investment projects.
US Lending to Eastern Europe
65. Since the late 1950s, when the United States began shipments
of agricultural commodities to Poland financed by PL-480 credits, the
United States has extended about $1 billion in medium-term and long-term
credits to Eastern Europe. Approximately $750 million to $800 million
has been granted to Poland, with most of the rest going to Romania and
Hungary. Nearly $800 million has been used to finance deliveries of
agricultural products, and roughly $150 million to $200 million in
non-guaranteed credits have been extended covering exports of machinery,
manufactures, and licenses. Until this year, US lending to the USSR has
been small.
66. US affiliate and subsidiary banks in Western Europe have for many
years participated in financing West European exports to Eastern Europe.
More recently, US subsidiary banks have become fairly heavily involved
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in non-recourse financing. The Vienna subsidiaries of the Bank of America,
Continental Illinois Trust, the Chemical Bank, the Chase Manhattan Bank,
and a few others are particularly active in this money market. Chase
Manhattan has recently established a subsidiary finance company (specialist
bank) in Vienna. (The Dow Bank's interest in Noreco Finance of Zurich
was discussed above.)
67. So long as an East European bank maintains good correspondent
relations with US commercial banks and is willing to place short-term
deposits with them, the US banks will finance a limited amount of exports
to Eastern Europe on medium-term credit without Export-Import Bank
guarantees. Of the four countries denied Export-Import Bank credit and
insurance (Romania, Poland, and the USSR are currently the only CEMA
countries with access to Export-Import Bank coverage), Czechoslovakia and
Hungary hav .'.ie best access to medium-term credit from US commercial
banks. East Germany has kept dealings with US banks to a minimum, and
Bulgarian utilization, mostly short-term, is at its limit. Bulgaria's
indebtedness problems are well known among US banks dealing in East-West
trade. On the other hand, the relatively poor credit rating justifiably given
debt-laden Romania by the Export-Import Bank has not deterred US
commercial banks from undertaking commitments to provide partially
insured medium-term and long-term credits to that country.
68. Currently, total short-term and. medium-term East European
drawings on US credits probably amount to less than $100 million. However,
even without Export-Import Bank guarantees, in order to finance US exports
of plant and equipment, US banks would probably be willing to permit
outstanding medium-term and sing-term extensions (excluding CCC credits)
to Eastern Europe to reach a level of perhaps $500 million, of which Polish
banks could possibly draw as much as $300 million, Romania at least $100
million under Export-Import Bank cover, and other countries perhaps $100
million. If Export-Import Bank insurance and credit become available to
cover exports to countries other than Romania, credit would be related
less to hard currency supply limitations and would become more a function
of trade levels and Eastern Europe's ability to pay.
Prospects
69. The indebtedness of the East European countries in the industrial
West will almost certainly continue to rise in the 1970s. They clearly intend
to axpand purchases of machinery and equipment on credit and will
doubtless buy some other commodities on medium-term credit. But most
of them are at or near the level of indebtedness at which repayments could
become a burden, and they are also looking for ways to acquire Western
investment goods and know-how through joint ventures, preferably deals
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that encompass the furl range of research, r-roduction, and marketing of
manufactures. Whereas the Soviet Union can bargain for foreign capital in
exchange for the exploitation of rich reserves of raw materials, the East
European comparative advantage in joint ventures lies in manufacturing and
the exploitation of low labor costs.
70. Joint ventures probably are not the answer to the East European
demand for increased access to Western know-how and markets, although
such ventures have greatly increased in numbers in recent years. But Western
exports to Eastern Europe probably will be tied increasingly to Western
cooperation in facilitating East European exports. Thus the competition
among Western countries for Eastern Europe's trade probably will undergo
another shift - from improving credit financing to making concessions on
quotas ..nd tariffs. extending help in marketing, and concluding tie-in
arrangements, particularly deals that involve partial payment in kind.
Promoting imports from, not merely exports to, Eastern Europe is likely
to figure increasingly as a condition of maintaining or increasing a share
in the East Europea., market.
71. Growing East European insistence on tie-in dews, together with
a prospective slowdown in East European exports to ;ndustrial West,
suggests that the absolute level of indebtedness in the West will rise less
in the 1970s than in the 1960s. The rate of increase will surely be lower.
Even so, the total medium-term and long-term indebtedness is likely to
amount to considerably more than $5 billion by the mid-1970s (in terms
of current US dollars). How large a share of this expanding debt the United
States will finance depends finally on the US business community. If
business interest is strong enough, Export-Import Bank coverage and the
necessary legislation for most-favored-nation status will probably come soon,
and US firms will learn to sell in Eastern Europe and to help Eastern Europe
sell in the United States.
72. On the basis of the volume of new orders for 'A",-stem capital
goods in the past year and the CCC credits made available, Soviet
indebtedness will continue to increase in the future - probably at an
accelerated rate. The USSR has sought to lighten the burden of its growing
debt by concluding "self-liquidating" credits - that is, credits to be repaid
with the products of the installation built with these credits (for example,
gas for pipe and wood products for wo 3 processing equipment). The
multi-billion dollar liquefied natural gas project being discussed between
the United States and the. USSR would involve this sort of arrangema?t.
73. The United States is expected to play a major, if not a dominant,
role in Soviet financing of its imports from the West in the future. In
addition to the CCC line of credit, the Export-Import Bank and Soviet
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officials currently are negotiating long-tern credits worth some $200 million
in support of US exports for the Kam i truck plant and a plant to
manufacture tableware. Moreover, the Bank of America has announced that
it would lead a 13-bank consortium in financing $68 million worth of
tractors to the USSR over seven years (apparently without Export-Import
Bank participation), and the First National City Bank of New York and
the Chase Manhattan Bank have revealed that the had applied for
ermission to oven facilities in M scow.
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Glossary of Technical Terms
Bank acceptance: A time or term bill of exchange discounted by a
commercial bank. A bank will usually stamp "accepted" across the face
of the bill. The element which gives value to the bill is the credit standing
and reputation of the bank which accepted it. Once accepted by a first-class
bank, a bill can be rediscounted in the acceptance market, allowing the
bank to replenish its funds for additional business. In the case of East
European bills, the terms of acceptance credits sometimes require that the
drawee (importer) must also accept the bills before they can be discounted
as acceptances. This type of bill is called "two-name paper," a
self-explanatory term.
Bill of exchange: A negotiable draft drawn by an exporter on an importer
at sight or over a specified credit period to cover the contract price of
goods in a trade transaction. In East-West trade, bills of exchange are
associated with short-term transactions and are generally drawn under a
letter of credit opened in the exporter's favor.
Buyers' credits: Credits granted directly to foreign buyers by oanks or
other credit institutions, enabling them to pay cash to suppliers for imports.
Clean credits: Time or sight deposits and letters of credit in which no
documents of title are called for and which do not involve goods.
Discounting: The term used to refer to the commercial bank practice of
buying bills of exchange and promissory notes from exports by paying the
present value of the debt which it will collect at a future time.
Documentary credits: Financing, usually by letter of credit, requiring that
the trade documents (invoice, bills of lading, insurance certificate, and
others) accompany bills of exchange when discounted at a commercial bank.
Eurodollars: A dollar deposit, usually on a term basis, made with a foreign
bank outside the United States.
Factor: A supplier of funds, generally in Eurodollar or nun-recourse
financing.
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Financial credit: As used in this memorandum, financial credit refers to
credits granted by Western banks or other sources to East European banks.
Distinguished from buyers' credits, which are granted to specific importers.
Guaranteed credits: Credits insured under export insurance programs of
government and government-supported agencies in the West and by the
Soviet-owned Garant insurance company.
Jobber: A financial institution, generally a commercial bank, prominent
in Eurodollar dealings, and specializing in placing funds as an intermediary.
The Bank of London and South America, Ltd., is considered as one of
the major Eurodollar jobbers, and it has arranged a few East European
loans. Nonetheless, the Soviet banks in the West are virtually in a monopoly
position as Eurodollar jobbers where the CEMA countries are concerned,
having a part at some stage in every consortium loan going to Ea!:tern
Europe.
Letter of credit: A bank-to-bank credit facility extended by an exporter's
bank at the request of an importer's bank whereby the forme; agrees to
accept, for discounting, bills of exchange or promissory notes drawn in
favor of the exporter against the importer.
Non-guaranteed credits: Credits not insured under export credit guarantee
systems. Mainly non-recourse credits, Eurodollar loans, and a portion of
short-term and medium-term documentary credit.
Non-recourse credits: Supplier's financing whereby the bank accepting bills
or notes for discount absorbs the risks of advancing funds to an exporter
and of collecting payment from the importer. The bank waives its right
of recourse to the exporter.
Promissory note: A negotiable instrument issued by an importer containing
his promise to pay the bearer at maturity the amount specified on the
face of the note. Promissory notes are issued to cover periodic payments
required for medium-term and long-term credit periods.
Rediscounting: The sale, usually by a bank, of exporter's bills and
importer's promissory notes to another bank, an official rediscounting
institution, or any other source of refinancing, for the purpose of
replenishing funds and increasing liquidity.
Suppliers' credits: Credits granted by suppliers, usually through commercial
banks, to foreign buyers. In East European trade, letter of credit financing
and indirect non-recourse credits are the principal forms of Western
suppliers' credits.
Tied credits: Buyers' financing linked to the purchase of specific goods
or types of goods.
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