Export market risk and the role of state credit guarantees

Many countries offer state credit guarantees to support credit-constrained exporters. The policy instrument is commonly justified by governments as a means to mitigating adverse outcomes of financial market frictions for exporting firms. Accumulated returns to the German state credit guarantee scheme deriving from risk-compensating premia have outweighed accumulated losses over the past 60 years. Why do private financial agents not step in and provide insurance given that the state-run program yields positive returns? We argue that costs of risk diversification, liquidity management, and coordination among creditors limit the ability of private financial agents to offer comparable insurance products. Moreover, we suggest that the government's greater effectiveness in recovering claims in foreign countries endows the state with a cost advantage in dealing with the risks involved in large export projects. We test these hypotheses using monthly firm-level data combined with official transaction-level data on covered exports of German firms and find suggestive evidence that positive effects on trade are due to mitigated financial constraints: State credit guarantees benefit firms that are dependent on external finance, if the value at risk which they seek to cover is large, and at times when refinancing conditions on the private financial market are tight.