Schich, Sebastian Thomas
(1995)
Export credits and the costs of trade financing.
PhD thesis, London School of Economics and Political Science.
Abstract
This study is motivated by the observation that countries in adverse extemal financial situations have to make larger use of more expensive trade financing and payment arrangements. It attempts to contribute to the understanding of the channels through which the external financial situation of debtor countries affects their trade financing, and to identify the determinants of the costs associated with such financing. These costs reflect the higher risk of default associated with credits extended to them and include, for example, interest rate spreads and credit insurance premia. For the purpose of demonstrating the channels through which the perception of such a risk influences these costs, the study adopts the perspective of a "small" creditor or credit insurer, meaning that the risk is exogenous to the creditor/insurer. This leaves the problem of incorporating these risks in the credit insurance premia and interest rate spreads. For this purpose, a theoretical concept of the determination of credit insurance premia is established. Based on the idea that export credit insurance, viewed as a security, is similar to a contingent claim, such as a European put option, the concept uses tools from option pricing theory. Some of its implications are compared with observations and found to be consistent with them, i.e. there is some support for the following hypotheses. The less favourable a country's solvency and liquidity indicators, the higher are the insurance premium rates applying to it, the latter indicators appearing to be relatively more important than the former ones. Moreover, they are higher the greater the volatility of the rates of change in these indicators. The impact of the share of public (and publicly guaranteed) debt in total foreign debt on the costs of external financing is discussed within the same theoretical framework. It is shown that these costs may be a non-monotonic function of that share.
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