The view from the City: What is wrong with the ECAs?

This story is sourced from

The last taboo - or - what's wrong with the ECAs?

Contributed by Bertrand Grabowski, Board Member for Aviation and Rail, DVB Bank SE

A little more than a century ago, a few men including Kierkegaard and Nietzsche planted the seeds of what would become with Heidegger, Sartre and Camus one of the most influential philosophical schools of thoughts of the XXe Century: Existentialism. In essence - if I may say so! - they were questioning the very meaning of the search for a "reason to be" and concluded that existence precedes essence.

The current debate about the export credit agencies (ECAs) facilitating the financing of new commercial aircraft resembles greatly what those bright thinkers were debating: Can we satisfy ourselves with the existence of a system when consensus has been lost of his very essence? Or, to be less pedantic: what do we have ECAs for? What is the ultimate goal of the public authorities to support this programme with the taxpayer's money? Can we continue to apply the same grid of thoughts that was maybe valid when ECAs were absorbing 20% or less of the financing of new deliveries early in the millennium rather than the almost one third as they do right now?

Of course no one would pretend to address such a complex issue in just a few lines. Nonetheless, question marks can be put to a few of the pre-conceived ideas about the role of the ECAs. These, it can be argued, are promoted by each of the two opposing camps: (a) those that believe that the system is fair and efficient and consequently should not be disrupted and (b) those who are convinced that this whole setup of institutes creates the very conditions for a systemic unfair competition.

Assumption 1: ECA eligible airlines can benefit from placing very large orders because they know that ECA support will be there.

• This argument is one of the cornerstones of a letter that a few European airlines addressed to their authorities in January 2010, protesting against the ECA system. I believe that statement is questionable as I have never seen Ryan air, Qantas, or Emirates placing "large orders" because of ECA availability. Remember that ECA commitment, if available, is confirmed around nine months before deliveries while orders are placed much earlier. Usually at the time any airline is placing an order, it has no idea of the future availability of ECA support. As unpleasant as it may be for some, these airlines are placing orders because they have a robust business model and the space to grow.

Assumption 2: ECA aircraft finance is available at a very competitive rate, often cheaper than commercial debt.

• This is another statement from the airlines' letter mentioned above and which is very true. The average pricing of an ECA deal has nosedived to a jaw dropping Libor plus 25 basis points recently, plus fees, while the strongest airlines among the list above would probably not pay less than 170 basis points (plus fees) on the commercial market. In other words, the US, and EU taxpayers are happily subsidising some of the strongest airlines in the world to compete with their own domestic carriers Absurd, and it is understandable this is "testing the sense of humour" of (not eligible) Easyjet when a competing "eligible" brand is raising billions at a token margin (Ryanair was, according to public records, the airline number one "client" of the US Export Import Bank as of September 2008 and as of September 2009).

Assumption 3: Yes, there are some flaws but with the new aircraft sector understanding (ASU) system, ECA support is going to be more expensive.

• We can hear this in Toulouse as well as Seattle; however, the question is not whether the new ASU system is going to be more expensive than large aircraft sector understanding, because, it is. The question is whether the ASU system will remain cheaper than any commercial alternative. Obviously, at an upfront premium of 4 % for the best rated airlines, it will. Those airlines mentioned above didn’t pay  more than 170 basis points per annum to raise commercial money on a 10-year secured deal and the picture does not change dramatically if you go down the rating scale.

Assumption 4: The ECA system is profitable for the taxpayer because of the balanced portfolios that are been financed.

• With sincere apologies to my good friends at Ex-Im, Coface, Hermes and ECGD as I find this argument very tricky. Is it because the system, as a whole, does not cost any money to the taxpayer as the taxpayer's money can be used to subsidise those who do not need it? And because the taxpayer shall not be exposed, is it right that ECAs "balance" their portfolio with airlines that often carry the best rating in the industry? Again, what is the essence of the ECA arrangement as conceived by the founders fathers: (a) to help those airlines that on their own cannot raise commercial financing or (b) to follow a business-model that should not lose money and thus results in lending to Qantas and Ryanair?

The ECA system is at a turning point and to dismantle the "home country rule" as apparently discussed is not more than a poor substitute for the more fundamental questions that need to be addressed. The collapse of the financial markets in 2008 and, its very slow recovery in 2009, fully justified the ECA massive intervention to prevent what could have been otherwise a significant funding gap with devastating consequences for the employment of thousands of workers in the aerospace industry. However, today, two years on, there are no reasons why we still have $20 billion of taxpayers' money thrown out to the party thereby potentially disturbing the vaunted level playing field.

PS: Note that DVB Bank S.E., does not provide ECA related financial products