POLITICAL RISK INSURANCE:
A SOLUTION TO CAPITAL FLIGHT?
by
FERNANDO PAIZ
B.S. in Industrial Engineering
Northeastern University, Boston
(1973)
Submitted to the Alfred P. Sloan School of Management
in Partial Fulfillment of
the Requirements of the Degree of
Master of Science
at
Massachusetts
the
Institute of Technology
May
Fernando Paiz
in Management
1989
1989.
All
rights reserved.
The author hereby grants to MIT permission
les of
to reproduce and to distribute
rt.
rin
this thesis document in whole
Signature
o f Author
Sloan Sc
Certified b y
Professor of
ol
of
Management
May 3, 1989
Donald R. Lessard
International Management
Thesis Supervisor
Accepted by
Alan F. White
Associate Dean for Executive Education
ARCHIVES
MASSmUSETTS INSiIUTE
OF TECHNOLOGY
JUN 2 8 1989
LRARIES
TABLE OF CONTENTS
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Aknowledgements
Abstract
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Introduction
7
Chapter 1
Capital
Flight
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Definition of
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Terms
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Magnitude of the Problem
Causes For Capital
Flight
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17
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28
Structural Causes . . .
Financial Markets
Capital Markets
Legal Systems
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Infrastructure .
Political Causes
Confiscation
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30
32
32
33
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35
36
36
36
40
40
40
41
43
44
44
45
46
48
Invasion . . . . .
Nationalization or Expropria
Intervention
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Special Taxes
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Removal of Protection
. . .
Price Controls . . . . . . .
Employment and Wage Controls
Calling In of Loans
. . . .
Intimidation . . . . . . . .
Devaluation
. . . . . .
Exchange Controls
Physical
Destruction
.
Economic Causes for Capital
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.
Flight
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49
Consequences and
Capital Flight
Implications of
For Less Developed Countries
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64
For The U.S. Banking System
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75
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87
For The United States
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Chapter 2
An
Flight? .
Insurance Solution to Capital
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Country Risk Assessment
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Statistical
Modes of Sovereign Risk Analysis
A Practical
Application
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94
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95
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97
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103
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113
Ris k
Insure Political
Entities That Could
Private
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Insurance Companies
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125
The U.S. Government .
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129
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131
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145
Private Banks
Multilateral
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Organizations
.
Chapter 3
The Multilateral
Investment Guarantee Agency
Scope of Guarantee Program .
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Eligible
Investors
Eligible
Investments
Covered Risks
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. . . . . . . . . ..
Premiums and Fees
. . . . . . . ..
Future Expansion of
the
Insurance Program
Chapter 4
Latin American
147
. . . . . ..
....
Investment Abroad.
. . . . . . . . . . . . . . . . . . . . 148
Rationale
Chapter 5
Conclusion
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Interviewed
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Subjects
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1
Appendix
List of
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..
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Appendix 2
Questionnaires Used
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.166
Appendix 3
Sample
Insurance Policies . . . . . . . . . . . . . . . 180
Appendix 4
Sample Agreement Between
Index of
Insurer and Host Government.
Tables
and Figures
18
. . . . . . .
Table
1 -
Balance of Payments Accounts
Table
2 -
Deposits of Non Banks Held Domestically
and Abroad, Argentina Brazil, Mexico. .
.
26
. . . . . . . . . .
39
Investment as a % of GNP,
- Savings and
. . . .
. . .
..
Average 1960 - 67
69
of Major Latin Debtor
5 - Foreign Debt
. . . . . .
Countries, at years-end 1988,
76
Table
3 - Expropriations
Table
4
Table
215
.
by Region
.
.
5
6 -
Balance of Trade By Regions
91
Trade By Regions
92
U.S.
1981,
Table
U.S.
1987, Balance of
Table
Political
Risk
Indicators
.
.
Risk
Indicators
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Table
Table
9
-
Financial
Table
10
-
Economic Risk
Figure
1 -
Real
Interest
Argentina, Bra
Figure 2
-
Cumulative
Deposits,
Figure
Figure
3
4
-
-
Dol
1981
Rate of
Return
Capital
Flight
of
Return
Rate
Capital Flight
Figure
5 -
The
Investment
.
ndicators
.
.
.
.
.
.
108
.
.
.
109
107
ates for Saving Accounts
il,
Differential
.
.
51
.
.
52
and
-
1981
Differential
Mexico 1981
Spiral
1985
Domestic Savings,
. . . . . . . . .
ar Value of
-1985 . . .
Argentina
-
1981
Mexico,
and
- 1985
.
.
.
1985
.
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54
.
..
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55
Acknowledgements
I
brothers for
and my
thank my parents
want to
encouragement to attend the Sloan Fellows program
for provid ing the
My special
gratitude to all,
support and
particularly, for
office during this
Special
read
and proof
and
thanks
the
quality achieved
a
I would
my
Celina and Laura
during the
first drafts of
is due
in
this thesis.
great part to
appreciation
I -thank for
but not
to
least,
I
wish to
and
personal
The
level
her comments
possible.
Fernando,
the patient
Dr. Donald Lessard,
support, direction
project.
Gabriela,
support
long hours needed to complete
Last,
have not
go to my wife Anabella for helping edit
children,
five
financial
goal.
insistence that each point be as clear as
To
M.I.T.
helping hand at my
both,
Without
to accompl ish this valuable
been able
of
year.
lending
at
the
Roberto,
expressed
this project.
express
for
interest
his
my sincere
enthusiastic
in my
research
POLITICAL RISK INSURANCE:
A SOLUTION TO CAPITAL FLIGHT?
by
FERNANDO PAIZ
Submitted to the Sloan School of Management on May 3,
in partial fulfillment of the requirements for the
Degree of Master of Science in Management
1989
ABSTRACT
if political
to determine
this thesis is
purpose of
The
stem
to
enough
incentive
provide
will
insurance
risk
America.
Latin
in
capital flight from developing nations
The study is based on a review of the literature on capital
flight and country risk assessment and on interviews with:
their assets
investor s holding portions of
Latin American
by the
followed
rationale
the
study
abroad, in an e ffort to
perpetrators of capital f light;
American
holding Latin
U.S. banks
of
Officers
sort;
this
of
asses their support to a project
debt,
to
companies
insurance
government-controlled
and
Private
region,
the
in
coverage
risk
providing forms of political
assessment;
risk
to understand actuarial country
organizations providing financing
Officers at multilateral
to LDCs, to understand their developmental policies;
of Commerce,
officials at the Departments
U.S. Government
implemented
policies
the
comprehend
to
and Treasury,
State
flight.
capital
of
to deal with the problem
not
risk insurance is
concludes that political
The study
Structural,
flight.
capital
reverse
to
incentive enough
investor's
influence
causes
political
and
economic
foreign
of
security
the
seeking
continue
to
decisions
diversification.
Thesis Supervisor: Dr. Donald R. Lessard
Title: Professor of International Management
Introduction
prospect
the
great part
in
Capital
investment.
capital
with
is due
nations
American
the
to
lack of
faced
the region when
flees
confronting
of
Latin
in the economies of
growth
The absence of
risks
such
as chronic
currency devaluations, nationalizations, exchange controls,
and
or economic instability.
political
general
If
could be
such risks
insured by a carrier with
backing, Latin
long-term commitments and adequate financial
be
abroad could
savings
massive sustained
consequences of drawing
Latin
would
America
income,
growth
eventually
reserves,
economies,
providing the basis
The
investment
into
exports
increased
currency
the region.
increased
about
bring
GNP,
of
to
back
lured
allowing
capita
per
and
foreign
for
stable
for widespread prosperity
in
the region.
The
providing
purpose of
protection
insurance to
local
in
this thesis
form
the
investors
of
is to
of
determine if
political
deve loping nations
risk
would
9
flight.
Given
partner
of
given
(LDCs).
countries
what
chapter studies
when
The
The main sources of
American
banking
were
personal
investors,
and
government and
insurance
in
rationale and
investment
political
risk
provides some conclusions.
information for this research
the
included Latin
These
United
executives,
international
third
The
capital
interviews.
and
and what
it,
country risks.
his demand for
last chapter
risk
political
could do
effecting
diversification abroad, and
insurance.
The second attempts to
the Latin American investors'
process
decision
to cover
magnitude
the causes,
providing
entity
type of
needed
premiums are
of
feasibility
the
protection,
flight.
capital
and consequences of
establish
studies
first chapter
The
project
be
less developed
American
to Latin
the analysis
in
will
emphasis
special
States,
a trading
the region as
the importance of
the United
capital
to stem or reverse
incentives
create the adequate
States,
officers
and multilateral
private
of
the
organizations
10
with
dealing
supplemented
flight,
Latin
with
These
America.'
literature
on
the
sources
subject of
were
capital
country risk assessment and economic development of
the LDCs.
For a detailed list of sources please refer to the
*
Latin American investor's names were kept
appendix.
I have identified
confidential as per our agreement.
their country of origin.
only
seldom
can
manufacturers
and
Commerce
a
is not
there
in which
any state
flourish in
of
the justice
in
of confidence
certain degree
government.
Adam Smith (1776)
Chapter
Capital
I
Flight
Definition of Terms
Discussing
strong
emotions.
Man's Loot" 2
facts,
the
issue
With headings
of
capital
flight arouses
like "Poor Man's
Debt, Rich
news media editoria ls subjectively confuse the
making it
probably one
of
the areas
where Latin
Americans are most misunderstood
symptom of a sick society,
Some view it as a
recover
failure to
America's
Latin
as a cause of
for
reason
rational
a
and
problem
debt
from the
exposure.
their
increasing
of
leery
be
lenders to
Others regard the term as a pejorative description
to
responses
economically rational
natural,
of
wealthy
confronted
have
that
choices
portfolio
2
The Washington Post, Jan
'89 article by James S Henry
12
some
residents of
Both views
years.
When
risks
political
join tax
they
hiding their
queue up at financial
their collections,
It is
When
of
think
Latins
as
people
themselves
exposures,
simply reacting as
their rightfully-owned assets
flight,
they
high
risk
suffering
rational
citizens
from undue risks.
investors.
Locals are overexposed because
their
diversification
in their
economic
is
in
home countries.
status
direct
It must be
through
conflict
foreign
naturally,
have substantially higher proportions of
invested
to protect
locals more than
country risk affects
protect
gives flight
capital
noted that
assets
politicians
and
such company that
perceive
to
drug
such a bad rap.
capital
tend
to
institutions abroad,
unreported profits,
evaders skimming
loot.
exposure
citizens fleeing
law-abiding
transporting
dealers
in some recent
debtor countries
are correct.
Their
their
they
own
desire to
international
with
national
Lessard, D., Williamsen, J.(1987): Capital Flight: The
3
International
Problem and Policy Responses, Institute for
Economics, Washington, D.C.
13
loyalties.
Yet,
investors
in
are acting
counterparts would
In
terms
have to
opens a
saving
to
that
understand
The
the same in Florida
both cases
not.
second case;
necessarily
is
say, by
an
in Hawaii
or
considered
a
is the same
but
acting
purely
(1987)
justify
the underlying
the motivation is
suspicions,
and
What
running away from
moneys are
fears
investor
flight capital.
arguing that
variety of
on
the
But, when a Latin
Lessard and Williamsen
rationale in
for
property
it counts as
different classification
country
their
outflows,
same action
in California,
effort.
diversification
In the
"normally" as
capital
purchases a
account
is the difference?
the
rationally and
be defined.
in Japan
normal
for this diversification, these
in developed nations.
order
investor
does
looking
economical
and
reasoning
a
not
or
motivation.
Latin American movements
as
capital
escape
our
flight
because
local
the high risk exposure
example,
the
Japanese
of
capital
are
investors are
defined
trying to
in their home countries.
investor
would
be
In
merely
14
to opportunities abroad and fulfilling personal
responding
goals
of
in
the
lower
negative, nor
Yet,
I
As
flight,"
late
on the
st ill
pol icy of the
the
legality
of
agreement wi th
inflation.
it reduced
grounds
the currency
to perform them in
Venezuela encouraged
as
outflows
together with moneys transferred
intended
the
1981,
considered
always
not
classify these
the
own
justifies it.
are
as
their
in
in a hard currency
is it necessarily illegal
outflows
would
investments
returns are
outflows
countries.
capital
passive
their businesses
risks of devaluation
Capital
most
of
The fact these
countries.
with
course
normal
most Latin
return than the ones obtained
rates of
real
lower
note that
in
are
holdings
foreign
investor's
fact,
this
support of
In
yielding
investment portfolio.
risk diversification in his
illegally against
host government. The
conversion and
the policies
of
the
"capital
issue of
transfer,
host
or
government,
Williamson, John and Lessard, Donald R. (1987): Capital
International
Flight: Policy and Responses, Institute for
Economics, Washington, DC
4
15
have nothing to do with the fact
abroad because the
and held
at
risk in
to
trust
of
the stability
monetary policies.
There
of
rid
getting
from
implied
is a value judgement
flight, as it suggests
capital
"good"
Policy and Responses
capital
involving the German Jews
This
leaves
persons and
the
actions
being.
In fact,
as an
is
Capital
such thing as
example
the
flows
connotation
in taking
that
persecuted
their moneys out
of
logically perceived high risks to their
their assets.
existence of a
Latin
of
flight" differs
"capital
in the 1930s.
German Jews were "justified"
Germany because
the common definition
states there
citing
flight,
in
timely
currency.
overvalued
outflows."
"undesirable capital
Flight:
ones who
Venezuela, the
fictitiously
a
of
and
fiscal
country's
their
Dollars were only very
exchanged Bolivars for U.S.
in
History has taught them not
the case of
In
consider themselves
investors
own country.
their
those moneys are converted
Implicitly, we come to accept the
difference with those
America, where
individuals
feel
flows coming
out
of
their governments's
are confiscatory in nature, threatening their well
I will
discuss at
length this issue when describing
16
nature
the
the risks
of
capital
gets
exposed to
in
the
LDCs.
encompass
caused
the abnormal
only
as a reaction to
go beyond normal
of
the
legality
desirable for
the term capital
this work,
Thus for
movements of domestic capital
specific regional
the
flows,
or
the domestic economy,
the definition of
threats and that
portfolio diversification.
of
flight will
this concept.
if
will
The question
they are
play no
or
not
role in
Magnitude of
In
balance
of
payments deficit with
for
was "caused by
comprised the tip of
flows
se,
the
hole;
iceberg
Measuring
these
accuracy
is a
capital
problem.
and omissions"
But this
figure
procedure
assumptions used
is
flight
figure
is this
Capital
with
flight per
of
used and
it with the "errors
in the Balance of
plagued with
degree
any
most often
equating
(specifically
it
flows.
One of the
accepted procedure is that of
it explained
for growing hidden capital
from a world underground economy.
is an important part of
useless
a
had
The fact
"asymmetries."
market
of world
value
such a statistical
payments
balance of
Monetary Fund
International
The
explanation
total
the
10% of
on the vicinity of
itself
words, the
In other
deficit equaled
trade.
was running an annual
the early 80s the world
billion.
$100
the Problem
Payments accounts.
flaws
regarding by
in
the
both
which
means
5 Naylor R.T. (1987) Hot Money and the Politics of Debt
The Linden Press/Simon and Schuster, New York, N.Y.
18
capital
outflows take place),
obtaining reliable
balance of
and
information.
payments accounts
the serious difficulty in
Lets
in Table
application to understand the argument
look at the schematic
1 and
I am
go
through its
trying to make.
Table
1
Balance of Payments Accounts
Goods and Non Factor Services
+ (A)
Exports of
-(B)
Imports of Goods and Non Factor. Services
+(C)
Investment
-(D)
Foreign Debt Service Payments
+(E)
Remittances from Abroad
-(F)
Transfers and Outflows
(G)
Total
Income
Current Account Balance
Investment from Abroad
+ (H)
Direct
+(I)
New Foreign Loans
-(J)
Amortization of
-(K)
in Foreign Assets of Domestic
Banking System
into Long-Term
Resident Capital Outflow
Assets
Short-Term
Resident Capital Outflow into
Assets
-
(L)
-(M)
(N)
+(0)
(P)
Source:
Foreign Debt
Increase
Total
Capital
Account Balance
Errors and Omissions
Increase
in Foreign Currency Reserves
by the author from Capital
modified
and Responses
Flight:
Policy
20
represent "normal"
Resident Capital
are more
Outflows
to
likely
is
t rue,
usually short
term
becomes a
matures and
will
convert some of
As
those same assets
is that the change
The point
to do
with the underlying rationale
assets outside of
This
first step
the
assets
(money
the account
holder
sophisticated f oreign
ones.
to keep those
It
(M),
assets,
of capital.
flight
ti me deposits)'.
market accounts,
term assets,
long
converted to short term
represent
is
flight
capital
(L),
diversification, whereas
portfolio
distinction can be m isleading.
of
to
Outflows converted
Resident Capital
assumed
analysts have
with, most
To begin
into
it
investor,
long term fixed
in no way
ompting
has anything
the
his own country,
investor
thus, not
meriting class ification under a separate category.
Both
If
an
investor
(L) and
is
thing
local
authoriti es.
di fficult
to
is attract
to do
Thus,
it
is highly
measure.
home,
the
the attention of
the
fleeing from abnormal risks at
it wants
last
are very
(M)
unlikely any reports
* Without exception, Latin American investors interviewed
the opening of foreign currency checking
indicated that
accounts and short term certificates of deposit was their
first step to secure capital outflows.
21
will
get
even
if
local
available at the
bank, outflows are hidden from local
This is achieved
authorities and government statisticians.
shell
of
occurring hidden as part
Goods;
(B)
invoiced
over
market" purchases of
foreign
under
"tax
haven"
trace,
impossible to
flows are
the
Most of
moneys
called
so
in
domiciled
corporations
countries.
the
particularly depositing
ways,
in many
is readily
and foreign currency
legal
totally
it is
instances,
In many
the government.
filed with
"black
or
Goods;
of
Imports
of
(A) Exports
under-invoiced
currency originating
(E)
from
Remittances from Abroad.
expensive
to the
investor,
occur
impose strict exchange controls,
externalities,
distorting
rates for certain
their
right
factors, and
example of
imports.)
familiar with:
full
to take
most tend
how one of
usually
more
mainly in countries
that
though
transactions,
Underground
(such
Local
in those that
introduce
subsidized
exchange
as
feel
businessmen
advantage
to abuse
these
or
of
them.
it
is
these distorting
Let
processes worked
me
share
an
in a case I'm
22
States.
dollar.
open
in the
the United
to Guatemalan
time, the
At the
to
exchange rate of
at an arbitrary preferential
Quetzales per
exchange rate
from
materials
raw
line was made available
The credit
manufacturers
1.6
of
the purchase
financing
credit
exclusive purpose of
Bank of Guatemala for the
the Central
line of
Eximbank' extended a
1986
In
prevailing
per
3.2 Quetzales
market was
dollar.
Importers scrambled to meet the many bureaucratic
requirements
savings
Guatemala
public,
for
loans,
these
the
required
thus
easing
(The
dollars.
purchase U.S
to
savings
the
recently devalued Quetzal.)
be
seems
government
to
the
pressure
of
the
to here.
The
ok up
problem is that the importer has no problem in
supplier or freight
of
transferred
inflationary
All
a 50%
they represented
as
getting his
forwarder to over-invoice the goods and
beat the system for a substantial
profit.
Eximbank is an independent U.S. Government agency that
helps to finance and facilitate the export of American Goods
and services.
23
dollars
of
be
will
the
the
(in
account
to
and
market
th e
importer)
of
name
good s at
gai ns
fictitic
usly
great
temptation, are
serve
as
damaging
types
These
too easy
incentive
for
foreign
obtains
cost than
h undred
in
the
thousand
materials
raw
become
a tax
b alanced and
properly
of
distortion s
to
hide,
capital
the
here
Note
outflows
the books
U.S.
local
a
1owe r
eight
process capital
suspicion!
an
50%
incremen t
a tax deductibl e
deductible expense keeping
beyond
Eximbank.
by
in
It
im porter.
the
his
this
By
cost.
$500,000
imp ort
Quetzales as
pai d
and e ventually
letter
through a
million
over-invoice d
for
double windf all
currency
worth one million
the exporter collects h is due and proceeds
shippi ng,
to deposit
for $1.5
invoiced
guar anteed
credit
After
example, raw materials
for
So,
and
create
a
in reality
flight of
the
most
a
U.S.
bank
form.
So if
account in
the
deposit
the name of a shell
accommodating "tax-haven"
is
made into
corporation domiciled
country, the Balance
in any
of Payments
accounts would have never been able to pick the transaction
up on
its
(0) Errors and Omissions account.
Although both
24
tend
to
other,
each
cancel
and
exports
under-invoiced
"black
happen with
would
the same
market"
purchases of
remittances.
when referring to the
I have used quotation marks
black market
necessarily illegal,
Guatemala the
tax
as
the name
code
Bank
has
the authority
currency in the country.
in a somewhat
need
example,
and
to buy
that only the
sell
in the
foreign
law remain
manner, as the condition
to apply the
law of
in
as a
to deduct
laws state
Inconsistencies
intentional
the government
For
not
is
currency in the open
purchasing
even when banking
or black market,
Central
implies.
allows businesses
expense the cost of
legal
existence
because its
currency
of
allows
their choice when they
to.
Freeing the currency market relieves the pressure
from
the Central
"official"
rate
Bank which cannot
The
Bank to operate with two or
three
the needs
rates of exchange that match the
of
the
the
importers.
to satisfy
system allows the Central
provide dollars at
of
intended economic policies
government, without needing officially to devaluate
25
Notice
the currency.
dol ar denominated
government owned companies holding U.S.
liabilities, maintain fictitiously
low debt
debt
in their
They
conveniently convert
Presuming
capital
by
at
the
(M)
expressed above,
this
it has
in fact
appropriate
be
it would
outflows,
Short Term
Capital
short because of
Though this approach falls
Outflows.
arguments
the pioneering
in
been used
the
to
studies
area."
The
existing
Institute
on capital
conference
measures
satisfactory.
ascertained,
of
Even if
International
for
flight concluded
resident
resident
Americans
is of a
Lessard, et al
that none
of
was
outflows
capital
the
be
thesis is that
the
capital
for this
stock
magnitude similar
(1987)
Economics'
its measurement accuracy cannot
the relevant point
estimated
*
books
and Omissions are
(0) Errors
include them as a part of
in
equity ratios.
rate.
official
caused
devaluation,
that without officia
held
abroad by
to all
Latin
the region's
26
foreign debt.
Any project achieving
the
return of
these
funds would have a tremendous relevance to the economies of
the region.
Table
2
Deposits of
Non Banks Held Domestically and Abroad,
in Billions of
U.S. Dollars,
In Domestic
Banking System*
year
Argentina
24.3
8.2
81
82
83
84
85**
Brazil
81
82
83
84
85**
47.
49.
35.
38.
38.
Mexico
81
82
83
84
85**
70.5
32.2
36.8
45.4
35.8
Source:
at year
World Financial Markets
end.
In Banks
Abroad
Deposits Abroad%
Domestic Deposits
6.7
7.1
7.9
7.6
8.2
28
87
94
99
115
8
8
23
21
22
9.
10.
12.
14.
15.
(April/May 1986)
*
Deposits (Sight,
Savings and Time) in local
converted at end of period exchange rates.
**
September
figures.
13
32
34
31
43
currency
27
Table 2 details
and corporations
1985.
deposits,
domestic
1981
the
magnitude
of
When expressed
1 15%
keep
fact citizens
a
willing
to
abroad
rather than
such funds have
for
enough to make every
phenomena.
for
the years
for
as a
to
the
ratio of
Argentina in September
1985.
The
in
reached
Mexico for
fi gures
deposits abroad.
estimated
of
these
from
Note
both domestically and abroad
(non-banks),
Argentina and
Brazil,
for
individuals
balances held by
the
larger
of
share
developing
of
savings
are
stock
at home,
and the
relative
importance
the local
economies, should
be reason
effort to
identify the causes for this
Understanding the causes,
identifying possible
this thesis.
their
nations
solutions
a critical
first step
is the central motivation
28
Causes For Capital Flight
occurring in major
outflows
not coincided,
for
circumstances.
rates
interest
United States.
interest
lack of
the major
causes
particular
country's
to external
As opposed
or
a
in
lie
capital
of
Latin American countries have
one to believe that
leads
flight
capital
peaks
discernible
that
fact
The
factors such as high
income taxation
in the
These source country causes, when analyzed,
grouped as
can
be
Lets
look at each
the
Latin
in detail,
investors
and economical.
political
structural,
particularly as perceived
themselves
by
and
the
by
banking
community.
Structural Causes
It
is
the cond itions
flight.
capital
For
sometimes
very difficult
to determine
if
cited are causes or consequences of capital
example, analyzing
outflows,
such
as
an obvious
interest
between the domestic system and
rate
motivator of
differentials
any foreign bank,
poses the
29
problem
establishing what comes
of
first.
form of
place,
reasoning takes
"chicken and egg"
Albeit,
capital
is possible to
always
of
roots
Capital
does
flight
risks.
commercial
market.
and
in
country
the
banking
Infrastructures
operations
and
and
not occur only as a reaction
the
laws or
his
it perceives that
country
remains
lacks a
investor will
the
On many instances,
opportunities
because
investment
deficiencies
structural
choose to place his assets abroad because
either
fact, an
Notwithstanding this
the
the
in
problem
the
in the LDCs.
economic upturns
investment
identify the
be made that the flight of
is also a cause of
to political
to face a typical
forcing us
in reality it
government's intervention.
argument will
in
problem.
economic
and
structural
are
An obvious circular
outflows.
turn are affected by capital
exchange rates
and
influenced by currency devaluations,
rates
Real
are deficient,
underdeveloped
functioning capital
incapable of handling
small
capacity of
in
large
absorption
scale
of
the
often included among the reasons
market are
to diversify their
investments abroad.
termed structural
These deficiencies are
the
local
local
or
commercial
codes.
due
investment
foreign
of
only attract a certain
will
economies
structures
investors seek
the
government,
Following
to
its
the
legal
because
amount of
institutional
systems
is an analysis of each:
Financial Markets
are not
Latin America
markets in
Financial
of elici ting
developmental role
their key
doing
are
And they
not
savings efficiently.
higher
of
reflow
significant
up
to attract
geared
residents' assets now held abroad.
lies
in
government
The
problem
policies.
Until public sectors in Latin America are cut back
borrowing
requirements,
in
both
scope
and
available
savings
will
continue
to
finance
state
inefficient bureaucracies and money-loosing
companies instead of capital formation with a high
rate of
return
.
.
.
..
Government
financing
practices
must evolve away
from compulsory, nonmarket
mechanisms
toward
voluntary,
marketdetermined
vehicles
that
price
capital
appropriately for both
public- and private-sector
users.
Warranted
also
are
the dismantling
of
credit allocation
rules and
the
phasing out
of
interest-rate
subsidies,
which
ration
capital
resources
to
established,
often
inefficient
companies at
the expense of
emerging industries.
and
31
not
should
institutions
financial
State-owned
their
base
should
and
treatment
enjoy preferential
financial
and
economic
sound
on
lending
of
structure
the
Finally,
considerations.
freed
be
should
countries
most
in
interest rates
encourage greater financial savings -- at home
to
rather than abroad.'
The
reform of financial
out
in
isolation
This
is
the
of successful
reforms elsewhere.
improve growth prospects,
other
reforms
must
raise investment and
protection of money-loosing
enterprises.
This,
the
allocation of
structural
out to
in turn,
If
resources.
changes, as
capital
the ones
can
make
government owned
flight
are carried
then the inflows
and
enduring
contribution to Latin American economic growth.
investors
countries
*
faced with developmental
and
with
the
World Financial Markets
option to
and
reforms
discussed here,
and
domestic
and efficient
financial market
remedy existing deficiencies,
foreign
debtor countries
requires expansion of
capital
of
reversal
Among
increase productivity, eliminate
subsidies and
savings,
cannot be carried
macroeconomic policies.
from supporting
lesson
to
markets
problems
positive
L a t i n
in their home
participate
April/May 1986,
of
page 10
in
fully
32
markets confront the tough
loyalty versus rational
national
choice:
capital
international
developed
Capital
Markets
Except
for
nations,
Latin American
larger
the
interest.
self
most LDCs do not even have an organized market where stocks
paper can be
or commercial
capital
does
markets
institutions to
This
appreciation.
available
invest
not
investments
for
a
corporations
registered
limits
high
to operate
they are very closely-held
lack of developed
the
masses
or
capital
that could show
limited
or
show
might
with the shortage
of
most enterprises to be
Though
partnerships.
proportion
in
the LDCs,
family corporations.
of
public
in
effect
Few
have
stock publicly traded.
Legal
The
the
allow
factor, coupled
statistics
their
The
in assets
long-term credit,
individual
traded.
Systems
poor
design
or inconsistent
law is also considered one of
application of
the structural
causes for
33
lack
of
additional capital
example,
few
suppl ier
to
and
hav
have
LDCs
L
creates
substantial
operation of
support
legal
commercial
discourages
that
abuse
the normal
credit a r d
Poor
to
in order
assets
due account.
chronic past
col lect
its
liquidate
courts
the
a
bankruptcy proceedings,
into
force a creditor
permit
that
codes
commercial
For
in the region.
investment
businesses as conceived
in the U n ited States.
slow,
condition
is very
threatening to
threat
protection or
what
knowing
easily
cumbersome and
generally
court
the civil
other hand,
the
On
system
corrupted.
inves tors who
to
expect
is
This
fear not
from
the
is
the
courts.
Infrastructure
Last,
pervasive
incompetent
utilities.
postal
lack
a
but
also
of
adequate
government
Poorly planned
critical
factor,
infrastructure
operated
public
caused
services
and outdated phone systems
services, highway and
by
and
and
port installations, etcetera,
34
are all
reasons why many industries choose not to establish
in the region.
This
is
an obstacle for
inefficiencies it creates are
materials
or
coupled with
labor
low
such as
advantages
geographic
the
issues
incentive to drive away
nationalist citizens.
enough to offset
These
political
the capital
risk,
the
comparative
costs, availability
location.
of
investment, as
of
raw
limitations,
are
from the most
enough
loyal and
Political
well
The
publicized,
continually
get
that
toppled,
replaced by other military "juntas" or
causes a
level
iceberg
of unrest that
the types of
regarding
investors are exposed
risks
caused by political unrest
government actions that
To
experiences
bring
of
constitutes
dictators,
the top
politically caused
of
the
risks to
Beyond commercial
in the LDC.
which
images of
often caricatured
rulers
military
American
Latin
Flight
Causes for Capital
capricious
lie a series of
can be destructive for business.
this
point
cases
extreme
across,
as
share the
me
let
related
during
two
interviews with Nicaraguan and Peruvian entrepreneurs, both
living
today
in Miami,
assured he
was not
businesses
had
described below.
Florida.
The Nicaraguan
investor
he stated
that his
exaggerating when
suffered
every
one
of
the
instances
36
Confiscation
The
compensation
outright
being
This
confiscation.
of
anarchy,
where
large mass
to
paid
the
owners
the
condition will
company, with
the
of
constitutes
a
happen only in
wants
government
no
a
state
"punish"
to
the economic problems affecting
scapegoat for
a
takeover
a
the poor, or
of voters.
Invasion
The
occasions
takeover of
led by
constitutes the
The civil
police
system offers no
and
company
forces
look
help or has
type of
the
invasion of
to
property.
the court
other way and
no authority
on
officials,
government
condoned by
most typical
mobs,
facilities by
enforce any
actions by the owners.
Nationalization or Expropriation
One of
the most extreme forms of
an expropriation is carried
out by the
political
government
risks;
through
37
its
court systems,
to
serve
for the well
for the fair
reimbursed
of
The
the stockholders.
understated
payment was made
matters,
payable
in
local
$ 3.0 million
(The
prevailing rate
This
million
for
in
future.
of
30.0 million Cordobas due in
exchange
in
is not a typing mistake.
is +/-
convert
10
paid at maturity.
1978 was
This year the owner will
Cordobas which
today the exchange rate
for U.S.
government
1979 by the
interest per annum
Cordobas per Dollar.)
93.2
government bonds
example, a property appraised
and paid for with bonds
12%
loyalties
to aggravate
into the
years
took
properties were
and
form of
in the
was nationalized
years, bearing a
the
appraisers,
currency several
real
In a
of
values
government
by
nationalizations
punishing political
revenges,
place perceived as
be
to
expect
their property.
market value of
Nicaragua,
in
However,
community, or
the
Owners
interests.
national
of
being
to
+/--
10
collect his
U.S.$
1,553.33.
After repeated devaluations,
60,000
Cordobas per Dollar!
38
bonds could
These
market
loss of
loss of
the magnitude of
point of
exposed
The numbers
in the
it
is
In effect
from which
locals are justified
officer
for
Latin
so.
Nonetheless,
Salvador,
the
corporate
Citicorp,
at
greatly receded, as
there has
last eight years
or
in
El
the past nationalizations of
banks
Mexico and Nicaragua have sent
tremors throughout
fears
are probably more
region.
localized
senior
Africa
them during the
not been a pattern of
robbery,
in seeking protection.
and
America
the way
debt after
legalized
Victor Meneses,
to
fears have
nationalization
restitutions
one way of
the war.
According
investors are
is reminiscent of
government deflated its
the German
hold to make the
still
the risks to which
This case
region.
into
split
one person would have been
several.
the point
Yet,
higher.
have been
would
value
remains, the
the
maturity, and their
discount in the years before
levels of
varying
at
sold
been
have
As of
in Central
the communist
today,
these
America, due to
government
South American country.
in Nicaragua,
the
threat posed
than in any
Table 3 shows a comparison
frequency of expropriations by
region,
by
other
of
the
in the world between
39
1960
and
One
1976.
developing regions
can see
in total
that
America
Latin
of expropriations;
number
though they have affected, as compared with the
world,
a
operating
political
low
percentage
the
U.S.
and justifies the perceived
investors
feel
U.S.
rest of
a
of
nations
risk to which domestic
they are exposed to.
Table 3
Expropriations by Region,
1960 -1976
Total Number of
Expropriations
Latin America
Arab States
Black Africa
Asia
Source:
the
lot about the
government with Latin
level
even
corporations
owned
These data say
in the region.
clout of
of
leads
As % of U.S companies
in the Region
144
78
39
31
Shapiro, Allan C. (1982),
Multinational Financial Management,
Allyn & Bacon Inc., Boston
2.6
20.4
8.1
2.2
40
Intervention
to the
organized unions,
type
This
positions.
government
by
government
outright appointment of
of
actions
directors'
of
board
or
administrative
to
officials
exercised
controls
subtle
from
forms;
many
take
government can
the
by
Intervention
normal
the
inhibit
operation of business to such a degree, they may eventually
destroy
it.
Special
Taxes
Special
taxes
taken
the
with
particular business
Removal
Some
countries
to
In Nicaragua, the
enterprises.
were
opposed
as
industry,
are taxes
only
of
levied
particular
on a
equally
applying
all
to
investor held these actions
intention
of
in order to control
harm
causing
to
a
it eventually.
Protection
companies are
because
able to exist
special
barriers
in developing
for
entry were
41
taxes
certain
These special
access
or granted
of
subsidized
financing.
industry wide, and
for
lifting
of
A surprise
years.
originally offered time period
protection before the
expires,
exempt of
to
treatments are offered
a predetermined numbers
this
had been
competitors, they
on foreign
imposed
ability to
eliminates the companies'
practically
operate.
Price Controls
A venture can easily be destroyed
to
regardless
stop
of
selling price-controlled, money-loosing
products
pharmaceutical
nationalization
products
the
the
if
Laws
capriciously created
terms
for
sell
fines
The
true
to
price
simply
items
to
is not
to immediate
of
necessities"
for
and
speculation"
bring
firm and
the
goal
level,
inventories
liberally applied,
inventories,
its managers.
"basic
"hoarding
against
and
itself
sell
to
refuses
government considers
masses.
orders to
it
expose
will
is forced
manufacturing
company
A
feasible.
necessarily
it
option,
The obvious
costs.
its
given
a
products at
its
some of
sell
if
is
to
court
jail
distract
42
sector for
of
the
easy
is
order
the
inv oice for
cover
irr ationality of
the off icial
controlled
econom y,
This
is
securely
balance
(to
the product)
in
purchase other
cash to
as
it
roo ted
in
of
types
these
unreported
an underground
usu ally the beginning of
government
s.
A Peruvian
price
of
controls
manufacturer.**
growers of
investor
almost
the
forced
The government,
grain, prohibited
The type of
related
where these
a case
closing
of
a
cereal
in an effort to help
imports
and
imposed
industry has been disguised in order
the identity of the subject.
10
and
accept
the system, will
keeps
or
sup plies
law in
the
supplies
needing
price, and pay the
uses this
abiding
law
otherwise
agreed price
The corporatio n
profit s.
action
Customers
true mutual ly
the
cash.
price
that force
survive.
unders tanding
price controls are one
imagine why
t heir companies outside of
to operate
to
to
factors
first
manage rs
an
designed public policies.
ill
It
the private
to
the blame
to shift
attention and
public
local
minimum
to hide
43
prices that were higher
of
the finished product
below
raw
at the
materials
to use
currency needed,
the
government
their
after
Even
foreign
the request was denied. Facing bankruptcy,
eventually
the
revised
price structure,
Resilient
to operate.
to continue
and entrepreneurial
management
import its
secure the
to
own sources
its
the company
allowing
Facing huge
prices.
world
lower
well
that was
level
producer requested to permission to
the
offering
a
was set at
costs using domestic raw materials.
its
losses,
The price
than world market ones.
ownership
tested
are
to
in these instances.
limits
Employment and Wage Controls
A company
or to
minimum wages,
maintain
Sometimes unions
needed.
decide
can be forced to pay fictitiously high
is
who
desertion
particularly
or
larger
are granted
who
be
can
it may sound, companies
Surprising as
from paying
hired
a
higher wages when
of
qualified
applies
to managerial
the
than
authority to
fired,
and when.
can also be prevented
needed,
personnel.
work force
thus promoting
This
last
the
case
positions, justified by
44
the
that management
view
myopic
In of
Calling
of
takes control
loans,
government's
that
or with
government
the
is done to
Often this step
intervention of
"legal"
to call
in
refuses to provide
the same effect,
sure not to create
is
chaos when
the banking system and proceeds
lending.
additional
Loans
suffer
Corporations
taking
labor force.
in the general
away income from those
"productive"
no
perceived as
Managers' high salaries are
function.
existing
serves
permit the
business in a
a
the international
way
repercussions
nationalizations do.
Intimidation
Officers
intimidated
or
Damage
union.
desertion
of qualified
feel
operations of
forced to
of
government officials
by
organized
normal
executives
is
caused
personnel
company
a
by
or
by
and by
can
be
a government
promoting
the
disrupting
the
the company when threatened executives
leave the country.
45
One of
occurs
the
But in
many
countries
of Latin
family
members
and
executives
constantly and without
Businesses
amounts
of
facilities.
and contribute to decrease the
invest
both
level
substantial
and
executives
totally unproductive
expenditures are
These
of the authorities.
to
forced
of
occur
stockholders
of
protecting
capital
kidnapping
America,
apparent control
are
security forces.
the
of
and efficiency
integrity
has
in developed countries due
been dealt with very efficiently
to
intimidation
is a risk that
This
the form of kidnapping.
in
of
damaging types
the most
of productivity of
the
firm.
Devaluation
Without getting
for
as
into
this complex phenomenon,
it
export,
it
any analysis of
currencies
those
and
that
their
have
asset s
causes
important to mention it,
is
threatens particularly th iose
and
the
companies that do
liabilities
are
not
in
not
foreign
necessarily
46
convertible.
Intentionally, currency devaluation is being
listed among
political
other
mainly the
devaluations are
conviction
is based on
the
direct result
of
This
risks.
purely of
incompetent government actions and not
exogenous
economic conditions.
Exchange
The
can inhibit
the
local
government through currency exchange controls
the payment
operator
This happens
local
Controls
loose its
international
The Central
its deposit accounts
the name
problem
of
first
months.
option of
in the form
of
deposit,
in turn
will
emit,
company forwards.
currencies are
the central
bank,
scarce.
Bank
"paying" with debentures,
in
The
A
manifesting
processing delays of
Eventually the Central
in
remittances owed
abroad, a cashier's check
when hard
builds up at
all
Bank
the supplier which the
originates
backlog "dam"
bank,
making
credit ratings.
is required to
with the central
to foreign suppliers.
itself
foreign private debts,
when an importer
currency
against
of
3
to six
is confronted with the
in
lieu of cash.
47
if
own
the
reserves of
priva te
be able
discounting
that
or
just as bad,
the suppl ier's own exposure
in
that
from supp liers, usually
from the
such as
for
The
firm, can be
agriculture and
addit ional
its
longer
in
rating, but
of
accounts
f ind tho se accounts
1onger
no
be
1oss of
considered
refused because of
with o ther past
particular country.
wil I no
credit
its
credit wi 11
using
by
fr om any supplier
soon
are
country
it
p ortfo 1ios
their
their banks will
receivabl es with
in
los e
not
firm might
The
suppliers
eligible;
foreign cur rency,
secure open account ter ms
to
the world
domiciled
its commitm ents
managed to keep
firm
So even
countr y.
the
the credit rating of
downgrading of
immediate
the
about
brings
action
This
due
customers
com mercial
credit
not requir ing specif ic
collateral
to cyclic al
operations
devastating
commerce, creating huge
pressure
In the case o f my
family's
capitalization.
supermarkets and variety stores
business, a retail
chain of
in Guatemala, this
aspect alone motivated the opening
subsidiary buying
office in
that would be free
of this country credit stigma.
the
United States;
an
of
a
entity
48
Destruction
Physical
I want to identify
In this point
destruction of
such
property
terrorism.
policies,
coverage
events are
times
some
hazard
by normal
linked to
mentioned above,
ignored,
larger national
huge amounts of
that
are needed.
contributes
uncompetitive with the rest of
are refused
these
disturbances.
of
political
top management's
This waste
to
insurance
policies, as
insurance
with such elements
corporate resources
actions
and mob
riots
and
acts
malicious
Applying the war exemption clause of
To deal
often
turmoil,
civil
as revolutions,
events,
insurable
non
caused by
the
of
the risk
make
the world.
risk,
as
time and
is one
fact
LDC enterprises
49
Flight
Economic Causes for Capital
One
been
the
financial
markets
fortunes through
inflation,
rates
depositors
The
lost their
Figure
nominal
saving
rates
and
that using
this method
of
graph,
the
deflated
by
yields
period
return
percent
on a
hand,
CD rate, on the other
from -60
the
Notice
each country.
positive rate of
Argentina's
its
of
In
in those
computation, during this
not ever yield a
erratically ranged
1986.
were
return
of
inflation index
price
savings account.
rates of
graphically the real
saving accounts deposit holders
consumers'
Mexico did
few years
in a
assets.
between 1981
countries
negative
effect,
in
waited,
that
ones
1 presents
return obtained by
three
received,
have
lost
have
Adjusted for
inflation.
devaluations and
of return.
basically
savings deposits,
with their
banking
the
in
participated
that
masses
Brazil,
Mexico and
In Argentina,
LDCs.
the
of
in most
markets
financial
the
from
obtained
returns
erratic
the
flight has
capital
of
major causes
of the
in
one
50
to as high as +108
quarter,
allowed
set
(or has
the market
rates of
capital
of
patterns
aspect at
in this
These
these data alone, it
had
the
problem
major Latin American
countries,
hard
would
earned
entirely.
at
has
to
with the result of
of
capital
An
with the
these countries.
surprising that Brazil
exchange
that might prove
of
in any
these
not to protect
them
from
them
the
in
to be more
has
the three
outflows of
investor,
removing
least,
it),
correlate well
be almost irrational
convertible assets
proof.
LDCs.
savings by
Or
in following
in each
is not
of
Brazil
least, more stability.
return
flight
From
least
succeeded
savings return rates,
the pricing of
achieving,
in another.
percent
its
system
to
hard
inflation
Real Interest Rates for Saving Accounts
Three Major Latin American Countries
1981 - 1985
Percent per Annum
150
100
--
-- Argentina
..... ......... ...........
- .......
50
Mexico
Brazil
0
.-.
.-J..
... Z
.............
.......
-50
-100
1 2 3 4 1 2 3 4
1 1981
1
1982
1
1
2
3
1983
4
1
|
2
3
1984
4
|
1
2
3
1985
4
|
Year
Nominal Rates deflated by consumer
price Inflation Index.
Figure
**
1
Argentine 30 day CD rate
free rate thereafter.
Source:
regulated until March
'85,
World Financial Markets (April/May 1986)
published by Morgan Guarantee Trust Co., New York
52
Cummulative Dollar Value
of Domestic Saving Deposits
1981
-
1985
$2000
$1600
$10001
1 2 3
I 1981
4
1
1
2
3
1982
4
1
|
2
3
1983
1
4
|
2
3
1984
4
I
1
2
3
4
1986
1
Year
Figure 2
Source:
World Financial
Figure
trends
in
Markets, April/May 1986
2 presents
domestic savings
a graphic
comparison of
formation in
the
the
same three
53
countries, and
major Latin
in the
savings formation and accumulation,
the rate of
in
the
with that of
the erratic returns
The effect of
United States.
market,
compares it
is obvious.
This point
of
the rate
return
is even better
differential
The differential
equivalent exchange
returns
to
a regular
plus
each, capital
of
U.S. dollars
in
the
later,
the
interest, are converted back
rate of
exchange
at the
in a LDC.
savings account, and
Ninety days
a LDC.
in
dollar
U.S.
a
by depositing an amount
is calculated
States in
the United
between
equivalent amount
denominated deposit with one of
compare
made when we
The
the day.
percentage difference between the two amounts
is plotted
in
Figure 3 for Argentina, and Figure 4 for Mexico.
An
per
investor would have
year in Argentina, and 5.3%
a
compared the returns of
the
U.S.
From
the
investors had very good
Latin America.
made on average 39%
less per year
in Mexico,
if
low-yielding savings account
in
can
see
data analyzed
reasons
And that
less
before,
one
to take their moneys out of
is what they did, as
suggested by
54
Figures 3 and 4
that also depict capital
countries during the same period.
possible
capital
to see
the direct
outflows
From these
in those
graphs
correlation the
it is
movements of
have with the returns on deposits.
Argentina
Rate of Return* Differential
and Capital Flight
Capital Flows (Billions)
Percent
60%
2$
.............................
........................................
.. ...
. . ..
....
I... .
..
0%
-2$
)
........
-4$
40%
-----..
--..
--..
--..---.-------------------------20%
0$
....
-6$
-20%
...
.....
......
.....
....................
...........--
....
.....
.....................
......- -40%
-60%
-80%
8$
1 2 3 4 1 2 3 4
1 2 3 4
1981
|
1982
|
1983
1 2
1
3 4
1984
1 2 3 4
|
1985
'Realized rate of return differential
between domestic CDs in the U.S. and
Argentina
Figure 3
Source:
World Financial
Markets, April/May 1986
-100%
55
Mexico
Rate of Return Differential and
Capital Flight
Percent
Capital Flows (BillIons)
-2$
0-2$-
-6 -------. -- -----
-8$ ...... I ...
- --- -
----
1
1 2 3
1
1982
-----
-0%20%
-
-
--
--------------------------
..... ....... ..
1 2 3 4
1 2 3 4
1981
----
. ...-..-.-...
-10$-
1
--
-
-
1983
4 1 2 3 4
1
-
0
...... ....---60%
1984
I
1 2 3
0-0%
4
1986
1
Realized rate of return differential
between domestic CDs in the U.S. and
Mexico
Figure 4
Source:
World Financial
Kyung-Mo
Trade
Fund
Hu,
Markets, April/May 1986
senior
Relations Department
(IMF),
expressed
that
economist
of
the
the creation
at
the Exchange
and
International Monetary
of
a
futures
market
56
for
exchange
currency
in
deficiency
should
deficiencies
of
IMF
links
American
Latin
most
instruments
impossible with monetary
is
currency devaluations
Hedging
included
be
This
countries.
among
the
most developing economies.
capital
section.
this
in
discussed
risks
the
from
themselves
structural
the
In fact,
flight directly with restrictions to
conversion of currency and
A
protect
investors to
local
enable
market would
futures
capital.
of flight
the repatriation
for
environment
right
the
create
help
would
the
inability to protect oneself
the
from devaluation.
Note that averages
A
very misleading.
might not seem as too
or
60 percent
motivator to
of
the
the
can be
over several
years
big,
is
it out of
incentive
5%
but one single quarter with
overwhelming
local
currency, and
the
the country.
must be
investor's perception that
again at any unpredicted moment.
50
certainly an
one's money out
even better, deposit
deposits back,
return differentials
difference of
differential
take
of
To bring
even greater
the same risk may
those
because
occur
57
of
the
in
investment
conservative
flight an
capital
deposit
a
between
differential
economic
a
any
in
and
LDC
a
makes
country,
developed
rational
for the
imperative
return
the
terms,
adjusted
risk
In
substantially.
in
differential
the
increase
could
it
periods
certain
Yen,
the
or
Deutsche Mark
the
terms of
in
reasonably computes
the investor
If
U.S. dollar.
returns
in terms
in Latin America are usually measured
devaluations
that
remember,
to
important
is
it
Also,
investor.
local
substantial
industries with
few export
A
ahead
value added activities manage to maintain themselves
of
always under
inflation
Even these
fixed
companies,
capital
effects of
worth more units
not
enough
currencies
local
protected
because
These
Fixed
of
assets
huge
side
the
asset
is simply
do
time
not
lags
is
provide
in
the
by
the
in the market.
As
lags are mainly caused
inability to obtain financing
in
from
currency after devaluations,
true.
adjustment of prices.
companies'
not
their
loosing terrain.
The premise that an
local
of
necessarily
protection
investing
assets are
inflation.
of
grave danger
58
into hard
deposits
flee
no
to support
funds
to Figure 2
their
page 42,
deposits
domestic
lending activities.
for
the
Most companies
of
American LDCs.)
Latin
lack of
market prices
find
rates that
interest
it
are unable
to
finance
eventually
going
Peruvian
inventories,
bankrupt.
someone
country exposed
levels
that
risk.
plant and
This point
carry the
predict future
to
attempt
and protect the bank from this
for
to
impossible to
inflation rates
imagine
for capital
demand
replacement values.
below their
burden
major
recession, depresses
in a
goods
(Refer again
the cumulative dollar value of
in three
factor, coupled with
This
well
in
left with
currencies, the banks are
equipment,
difficult to
is
has not operated
Thus
a business in a
to such hyperinflation.
The
experiences of
brings
this
point forward
investors
interviewed
dramatically.
In
in Peru was of
1A
In Peru,
the
recent past,
120% per annum.
the official''
interest-rate
But to protect
itself
just as in many LDC economies interest
imposed and regulated by the government.
from
rates are
59
unpredictable and
annum.
To go
the borrowe r
govern ment,
amount than the
higher
to
ta ke
cost
the ra te
around
of
given
impo rted
financing
government's
deposi t 50%
of
import
licence
months
and
long
process of
investors
comfortable enough
the region.
exposure
T he app roval
in a
LDCs
in
a
the
the
importer
the
time the
normally
don't
in all
took
yet
feel
industrialized
limit their
these processes,
of
the
corporation
conglomeration.
for
raw materials,
risks and
industry through different
One of
as
as
sought to
diversification.
is known
a note
the macroeconomic swings in
of
multinational
the
could expect to give
one
In the United States,
particular
by
importation.
the
in terms of
investors have
that
impo rts at
its
per
Just imagine
i nventorie s of
is reque sted.
Local
nations,
of
520%
the bank proceeds
front .
up
thus with great delay
start to the
a nd
requ irement
the valu e
sign
to
asked
to
imposed
contr ols
re ceived,
interest c harge
its
the
is
one
equal
up being
ended
the banks
charged by
the nominal rate
escalating devaluations,
in
forms
the precursor
a stable environment,
Through
conglomeration
a
60
corporation
diversifies
.
own territory .
into
unrelated
within
fields
its
.
become
markets
individual
in
businesses
as
to limit the
Investors naturally [seek]
riskier.
of
line
one
any
in
would suffer
they
losses
The
their interests.
diversifying
business by
at risk is one of the things
management of assets
well suited;
Neo-classical Economics is
to which
argues that
this school of economics convincingly
in certain circumstances, diversification [meaning
one market] would contribute
across industries in
to economic efficiency and growth.12
In
instability
a
will
country
where
eventually
fear
investors
endanger
all
economic
areas
the
of
economy, the option of conglomeration is not a solution.
when
that
shows
theory
Neo-classi cal
cannot
economy
decentralized
a
in
investors
business
line of
in one
balance possibl e losses
to
others, they prefer
against possibl e gains in
hold safe but 1ow-yielding assets. 13
So
capital
instability
flight
and
takes place
the
as a response
difficulty
to
to economic
diversify
risks
The Second Industrial
Piore, M.J. and Sabel C.F. (1984):
Basic Books, New York,
for
Prosperity,
Divide: Possibilities
N.Y.
12
1
ibid
61
resources
productive
drawing
domestically,
long term
of
element
capital
the
reflection o f
returns
the
in
This propens ity
corporations
is strengthened by
U.S.,
the
of
stockho lders
h igher
produce
to
a
than in their
own.
In Latin
the tax code.
usually return, in the
divi dends, reserves to their stockholders, whi ch in
use
turn
of
hands
continue
the contrary, companies
America, on
form of
will
the
retained earnings is
long-term expectation
investment
their
that
outflows is
In the
expectations.
propensity to accumulate
historical
the
relevance economic
great
the
motivating
in
have
conditions
aspect of
of
the economy.
country, eventually causing a slowdown of
Another
out
t he cash
Individuals,
to
having
diversify
much
their
own
portfo l ios.
flexibility
more
than
corporations, find it easier to secure their assets usually
abroad.
The
in the
market
additional
the
ever
visible hand of Government
pricing
incentives for
of factors
capital
of
intervention
production
outflows.
causes
For example,
Guatemalan government that has historically controlled
62
the
interest rate structure banks may
loan
rates
long
to a
maximum of
high grade
term,
of
returns
yielding
of
certificates
11%
to
the proceeds of
his
dollars and finally depositing
as
collateral
Guatemala
taken by
which
his
to repeat
local
in
the
low cost of
to
hold
pressure.
the
limits
and,
local
enterprises.
could exploit
Guatemala,
Then,
out a
into
offering
new
loan
The same advantage
in
was
of
their
needs
all
in
order
to
to affiliates abroad.
of
as
it was
demands
drying
up
system free
such
the
on
to their
legal
available
capital
to finance working
In a financial
impossible
against
exchange
institutions
obviously,
the
precipitated
created unusual
resources critically needed
insured
local currency
in the market
This phenomenon
bank
was
multinationa 1 corporations,
rate
official
pushing
and
it abroad.
the Guatemalan Quetzal,
banking system,
lending
in
the time,
of
funds
Such distortions
devaluation of
loan
fixed
the U.S.
An investor
the process.
excess
At
in
deposits, take
subsidiaries
b orrowed
transfer
U.S.
1978
to his capacity in
this arbitrage by borrowing
converting
paper
20%,
17%.
deposit
in
per annum.
commercial
up
charge,
to
of
react to
63
market forces,
such demand would
it the element
and with
With
of
fictitious demand.
this we complete
to narrow down the causes of
analysis of
reversing
willing
The purpose
capital
the section that attempts
capital
its consequences and
stakeholders.
interest rate
the arbitrage opportunities
Thus, eliminating
increases.
have caused
flight, and
turn to an
implications for different
is to identify who benefits from
outflows,
and
eventually
to support an insurance scheme
who would
to achieve it.
be
64
Consequences and
Implications of
Flight
Capital
For Less Developed Countries
the
is
flight
levels that are
reduced to
absorb more than a
of any crisis.
below
levels
operational
This
has
that would
which
initial
the
been
reserves have
impact
reduced
barest minimum of
provide even the
forced most
developing
all
differ considerably
can compress
country
nations
reducing imports of
imports without
"Much depends on the
a
cases to
in most
flexibility for short-term economic management.
Countries
effects.
reserves are
exchange
insufficient
LDCs,
payments
balance
the
limited proportion of
In most
austerity programs,
which they
of
Foreign
the nation.
of
accounts
deterioration
capital
of
immediate consequence
first and
The
can
shift
to
carry
out
kinds.
in the
extent to
suffering adverse
degree and promptness with
resources
from
domestic
consumption to exports and provide domestic substitutes
for
65
imports.
of
type of
This
the stage and development of
The
lack of
backward conditions of
the
there
capital
is agreement
political
system
economist states
even among
ideologies.
in this
in
investment
the
a function
turn
sector." 1 4
the industrial
America is one of
nations of Latin
for
flexibility is
developing
in
fundamental
the region.
the extremes
El yanov,
In
this
causes
point
of
different
a
communist
regard:
in developin g nations is
Capital investment
First
reas ons.
several
for
important
highly
because technical modernization of thie economy has
to be accomplished in a very short tiine, bypassing
went
that Western Europe
the intermediary stages
Second,
through during the industrial revolut ion.
much more
introduced is
technology being
modern
developed
the niow
used when
expensive than that
Th irdly, modern
through that stage.
nations went
and
forces
labor
skilled
requires
technology
in general
considerable investmen t
consequently,
etc.
se rvices,
health
education,
special
and
nations
develo ping
in
Fourth, industrialization
requires the accelerated development of transport,
the
of
elements
other
and
services
trade,
Finally, the question
productive infrast ructure.
jobs and means of subsistence to the
of providing
Dell, Sidney and Lawrence, Roger (1980) The Balance of
1
Payments Adjustment Process in Developing Countries,
Pergamon Press, Elmsford, New York.
66
population is
expanding
rapidly
1
before.
never
as
countries
Without capital
This
keeps salaries
and
causes
written;
problem
that
nations,
the
would
lack
Latin
classes,
very
be
of
easily measured
U.S..
visa requests
Additional
America
costly
opportunities
in
force
fortunes abroad.
individuals to seek better
perennial
about whi ch
Hutton, commented that even
high
and
be
growth.
GNP
has
little
Sergio Garcia-
Senior Vice President and Financial Consultant at
comforts
can
of
talent flight from the LDCs.
Shearson Lehman
middle
stagnation
continuous
a
etc.
raising, consumption from growing
from
causes another
Stagnation
Granados,
it human
be
production;
of
technology, raw materials, physical plant,
resources,
been
never enough
is
investment there
the factors
for
competition
in these
acute
industrialized
many educated
This
Consulates
American
for
permanent immigration
investment
from
many
provides
at
capital
the
though for
the
symptom
by
to
the
the
private
* Elyanov, A.Y. (1977)
Economic Growth and the Market
the Developing Countries Progress Publishers, Moscow
in
67
quickly
would
sector
trend, Garcia-Granados
reverse this
added.
rates of
that
the
This
is
growth.
by
caused
to
tend
and
conditions.
So when the averages
get poorer.
This
lack
of
impossible
policies oriented
to the
to the creation of
it.
The
national
economic
savings
is
developing nations tend
argument
in
productive
with
to deal
hold
their
improve
or
decline,
inflation
the poor usually
to
revert by
of
government
redistribution of wealth, and not
not
this
of
impact
on
rich
in
the
low saving rates, and
to have
that upper
polarization
because
trivial
poor are not able to save at all.
this
more
the most damaging results
is one of
investment;
the
polarize.
usually the more educated/high
are better prepared
likes,
growth assures
continues to
that
the fact
negative
LDCs show
per capita GNP
wealth
population,
the
income groups
the
Negative
distribution of
segments of
and
capita basis, most
a per
measured on
is
GNP
when
that
causes
growth
Population
the
Cline states one form of
income
groups
in developing
68
The relevance of
aspect
flight.
nations
outflows
is
the
of
repercussions
population
16
real
of
exists
growth) and the
between
investment ratio,
and the
caused
the rate of
In developed
association
disinvestment
evidence
Thirlwall
economy.
among
slow rates
the
correlation between
for
point,
the
to
the
Cline, William
growth
of
As
strong
a
(adjusted
in a given
ratio
investment
countries
According
income
growth of
capital
by
is
there
first
the
GNP growth.
a
there
is
total
income
than between growth of
investment ratio.
developing
savings of
the country.
is stored outside of
back
capital
impact of
the
aggravate
already low per capita
The
But
to
to
contributes
that this
this thesis is
study for
Cline's
imitate.''
they nevertheless
patterns
consumption
with
and the U.S.,
in Europe
classes
those of their counterpart
whose
incomes when compared
low
relatively
countries have
stronger
and the
per capita
shown by from
Table 4,
income
there
(1972) Potential
Effects of Income
Cases),
Redistribution on Economic Growth (Latin American
Praeger Publishers, London, England
Thirlwall,
A.P.
(1974): Inflation, Savings and Growth
Developing Economies, St. Martin Press, New York, N.Y.
17
in
69
domestic savings
correlation between the rate of
is a high
and
formation,
percent of
expressed
investment, both
gross
a
as
GNP.
Table 4
Savings and
Investment as a % of
GNP,
Average
1960 - 67
Gross
Investment (I/Y)
Domestic
Savings (S/Y)
Latin America
Africa
South Asia
East Asia
South Europe
Middle East
16.3
13.1
11.3
11.0
21.5
14.8
17.7
16.7
13.9
15.6
24.9
19.8
Average for LDCs
15.0
17.8
21.7
21.2
"
Developed Countries
Source:
Pearson Report (1969), Partners in Development,
Pall Mall Press, London, England
I perceive
a
form
of
Investment,
usually
vicious
the problem as a self
circle
as
depicted
is a precondition for economic
necessary
for
a
country
to
fueling spiral;
in
Figure
5.
growth, which is
sustain
political
70
stability
(as
the voting population will
to support the status quo).
considered to post a
is
evaluating investments
incentive
an
levels
High
investment,
Figure
The
savings
which
country
investors.
So when
risk
normal
motivating
of
A politically stable
to
risk adjusted terms,
in
again
domestic
this
savings
becomes
ratios.
base
the
capital
fuel
and
lubricate
capital
economic
growth,
allows
for
the circle again.
5
Investment Spiral
Political
Stability
Insurance
Economic Growth
Investment
for
provide
to
institutions
financial
starting
lower
have every reason
Confidence
Savings
71
discussed before, must be addressed
factors, as
The
of reversed
impact
discussed
above,
from supplementing
worthiness
--
reversed capital
developing
of
flight could
this
issue,
inflationary effects
effect on
substitute for
indigenous
have
not
they tend
the
been
inflows
the 70s have seen
and that "external
savings;
economic
a key
large capital
arguing that
growth because
--
rate
improve the credit
I
nations.
Nonetheless,
into developing nations.
growing debate on
as
is regarded
concerned for any negative impacts of
little
to
expected
savings
that the
Given
it.
and marginal
indicator,
have
are
priori,
A
nations.
inflows
resource
of
positively the domestic savings formation, apart
influence
average
minimal
flight may be
capital
tremendous proportions for developing
as
if
is to be achieved.
stability and order
political
Other structural
in the spiral.
sufficient to sustain flow
not be
will
Confidence alone
one insurance can reinforce.
the only
link is
the "Confidence"
In this spiral,
a
such flows can
resources have
to work
rate of
return
as a
on
72
soon becomes a burden on
part of
money
of
importers,
supply.
deposits
In
in
goods
and services,
domestic
investments
argument,
I
consider
need to
part of
foreign
the money supply,
against exports and imports,
and are
used
in making
nonsense
for
i.e.,
and unmaking
The rest
by foreigners.''
total
local
increase the
United States,
the
are already counted as
such, turn over
for the
exchanging
without the
fact,
and as
as they would simply go
foreign currency reserves of
the stock of
foreign currency
each country,
currency
inflows,
with
necessarily
the case
be
capital
reversed domestic
to form
the recipient economy."
not
would
This
capital
the cost of
low, and
is
inflow-financed projects
of
the
the
following
if
any single
reasons:
Statistical analysis point out that
factor
is to be associated with underdevelopment,
it should
(1986): Migration of Financial Resources
Das, Dilip K.,
is
to Developing Countries, St. Martin Press, New York, N.Y.
Kindleberger, Charles P.
(1987): International Capital
Movements, Cambridge University Press, Cambridge, England.
19
73
over simplification to regard
of
accumulation
capital
before,
mentioned
the
stock of
in
needed
factors,
other
as
as
But
conjunction.
without some increase
is not possible
economic growth
matter
economic growth as a
alone,
are also
it would be an
Certainly,
capital.
indisputably be scarce
in
capital.
compared with
An empirical study showed that
capital
Europe,
Northwestern
and
U.S.
the
of
important source
a more
has been
investment
For great many of
the LDCs of today.
growth for
mechanics of take-off involve
the LDCs, the inner
which there
capital formation, for
problem of
a
savings and
domestic
ways:
two
materially
are
inflow of
resources
foreign
.
fact
The
..
.
that
catalyze
can
resources
foreign
of
inflow
the
economic growth cannot be over-emphasized.20
When a
constraints -LDCs --
For
external
fraction
example,
relatively
20
faces binding
resource
It matters
of
Manne
small
Das, Dilip K.
inflows
is the case for
can have a
if
little
($75.0
(1986)
that
million)
the
discernible
the transfer
the domestically available
found
exchange
foreign
and more often than not that
impact on growth.
a small
country
optimal
increase
is of
resources.
use
in
of
a
foreign
74
growth
exchange availability to Mexico would step up annual
of
industrial
the
Manne has
to 8.0%.21
sector from 5.5%
been criticized for overly optimistic interpretation of
but
results,
nonetheless,
fast
growing countries
gross
investments.
have higher
Differences
finally will
and growth
growth countries will
is probably the
capital,
some
of
as
see their
will
in
rates of
see
savings and
in the patterns
international
trade:
share expand, while
it contract.
22
As
the highest
in
rates
parts of
fast
slow
stated before,
most devastating consequence of
it also occurs
that
investment, productivity
reflect themselves
each country's development of
growth countries
stating
this position,
agrees with
Zysman
this
external
of
importance
is clearly made by his research.
resources
of
the
his
flight
the world that have
of population
growth.
Fast
growing populations and slow growing economies are the main
ingredients
in a recipe that guarantees turmoil
is
in store
for the future of a nation.
2
Das, Dilip K. (1986)
22
Zysman, John
Cornell
(1983),
Governments, Markets and
University Press,
Growth,
Flight
Implications of Capital
Consequences and
For The U.S. Banking System
return of
Any
will
outflows
capital
asset positions
strengthening the
Latin America.
exposure
that,
expansion
financial
bankers
of
Western bankers
in
than
more
the
before,
but also the
mean
developing nations
in
success
of
export
affect not only their own
in those countries will
development,
in
As it stands today, Cline believes the high
of Western
even
effect
substantial
a
have
stemming of
even the
or
capital
stability of
the
international
system.
In Mexico alone,
relation to
largest U.S.
capital
banks.
at
exceeded
Taking
40%
together
(which listed
Brazil,
Mexico,
Argentina,
(1984),
in nine
of the
Latin America's five
borrowers
Cline William R.
1982 exposure in
the end of
in order of
Venezuela
and
twelve
biggest
debt size are:
Chile),
the
Exports of Manufactures from
Prospects for Market
Developing Countries: Performance and
D.C.
Washington,
Access, The Brookings Institution,
23
76
exposure of
(for Security Pacific
capital
in
a range of
and
still
140 -
a high
to
262.8%
of
falling
banks
with most
The banking system was,
percent.
continued
from
Latin
if
increases
effects of
cushion the
suffer deeply
loan
in
a potential
America, the
the outstanding
loss
reserves
series of
system
banking
they would ever happen.
Table 5 for data on
of
180
low 82.5% of
is quite vulnerable.
Though
defaults
Bank)
Hanover Bank),
(for Manufacturers
will
ranged from a
the same dozen banks
Please
foreign debt
loan
would
refer to
balances
the major Latin debtors.
Table
5
Foreign Debt of
at years-end
Major LLatin Debtor Countries
1988,
in tbillions of
$ J120.1
Brazil
07.4
Mexico
59.6
Argentina
35.0
Venezuela
Source:
dollars
Chile
Peru
Colombia
Bolivia
World Bank est imates as published in
Street Journal (March 89)
$ 20.8
19.0
17.2
5.7
The Wall
profits
substantial
enjoyed
flight capital,
recipients of
being the
dual
bankers have the
On the other hand,
and
for years have
So by reducing deposits abroad,
to reverse capital
flight poses a potential
potential
has
of
source
experience
flight capital
suggests
it
is
interest
rates
dilemma for the
a
as
Is evident.
sources of
deposits.
It
The
possible to
facilitate
secret
in exchange
keep its whereabouts
and
below-market
other
a scheme
flight capital
to big banks
deposits
obvious advantages over
Swiss
for
The importance of
industry.
loans
deriving from syndicating
to Latin America.
banking
role of
on
the
they
deposits
receive.
Flight
capital
.
.
was
often
different
in
in
be
to
appeared
it
terms
practical
were
origins
its
If
terms.
accounting
secrecy might
the need for
sufficiently dubious,
and more
"deposit"
a
like
less
behave
it
well make
the
of
resources
capital
long-term
the
like
of
attribute
an
is
This
institutions.
financial
had
banks
Kong
Hong
and
Swiss
the
flight capital
long appreciated.24
than
Naylor, R.T.
(1987) Hot Money and the Politics of Debt,
The Linden Press/Simon and Schuster, New York
24
78
in
any reduction
deposits
from
would not
make
America
In
worth pursuing.
a banker
difference
make a real
banking
year, as
pursued
countries and
in the
U.S.
policies
supportive
of
The deposits
year after
Other
World, and
the
they
foreign
In
to
Gonzalo de
las Heras
did
foreign
private
were
to
banks
States.
the United
in
my view, the
legislation, income
in particular
successful
individuals
attract
topics
United States has acted
the
the past,
to the rest of
Latin America.
25
removed their
reasoning creates a series of
line of
This
rise
significant
any
industry.25
to the
as
that would
from the U.S.,
capital
reversed
the Arabs
Japanese or
If the
difference.
such magnitude that
of deposits stemming
Latin
The
deposits.
of
reduction
in the market is of
existing
liquidity
flows to
in any
than
portfolios),
(loan
assets
their
of
quality
the
of
area
the
more vulnerable
and Western Banks, are
But U.S.
like
firms
nation historically
capital,
tax exemption
such
as
on interest
79
income,
for certain privacy of
was
disadvantage
view,
circulated among
following aspectS
a.)
for
in competing
1966 a draft memo on
economist
Chase
at
at a
that U.S. banks were
Swiss
flight money with the
money centers,
international
and other
in early
The memo held
Manhattan Bank.
and allowing
information.
Opposing this
flight capital
insurance programs,
deposit
federal
mainly due to
the
26
ability for
the C.I.A., F.B.I.,
Treasury
U.S.
and the Justice Department to subpoena clients records.
b.)
U.S.
regulations which
c.)
U.S.
restrictive investment
1imit
the secrecy of
estate and
investment.
26
Naylor
(1987),
page 33.
and
brokerage
investment activity.
withholding
tax
on
foreign
80
d.)
deposits
the
generally
foreign depositors
that U.S.
and
especially
world's
industry has
Latin
and being
Americans,
recycling of
I
banks
were unfounded.
broad appeal;
has
negligible
a
refuge
enjoyed
(much
in
powerful
are
from political
handling
the banker
the dollar
currency, the country
negligible probability
Those
individuals seeking
moneys
are naive
foreign funds,
Bank concerns
reserve
and
confiscation,
inconvertibility.
the
sophisticated
investment managers
the U.S.
leading
unmatched stability,
or
it.
in fore ign markets.
banking center
is the
by
view
held
Chase Manhattan's
As a
of
manipulation of
the
in
inexperienced
exposing
the Cold War,
to a freeze as a result
or assets
e.)
in
the U.S.
of
role
of
revolution
probability
of
arguments
for
risks.
the recycling
first
the same
of
choice of
way
has
As such,
of
loan
wealthy
it handled
the
the Arab petro-dollars).
believe this unique
influenced
function performed by U.S.
their behavior, as evidenced by their
loan
81
allocation, country
Latin America.
the
actual
country,
This behavior
economic
than
risk exposure and
has been
such
in
response
to
in
less
as
the
given
a
of
analysis
performance
to factors
pricing decisions
overall
lending
environment and each bank's characteristics.
of
the accuracy
review
for example
Banks,
Few
country's
the
against
forecasts
initial
their
actual economic performance, and thus do not asses
the reliability of their methods of credit country
risk analysis.
and
debt crisis
of the
the eruption
Since
herd
banks'
the
widespread rescheduling exercises,
to a
180-degree switch
prompted a
has
instinct
.
countries
developing
against
strong lending bias
environment
international
The changes in the
. ..
the
in
improvements
by
paralleled
been
have
all
by
analysis
risk
country
use of
quality and
segments of the international community.27
Hopefully
flight
region,
would
and
analysis and
then, reversing
reinforce
that
the
coupled
the flows
individual
with
the strengthening of
of
economies
improved
capital
the
in
country
risk
the asset positions
Feinberg, Richard E. and Kallab, Valleriana (1984):
and the Third World,
Uncertain Future: Commercial Banks
Transaction Books, New Brunswick, Conn.
27
of
82
the
banks, would
lines of
credit for
The
banking
by
federal
political
and
the doors
to achieve
government,
that
of
an
in
$400 billion
industry,
which
"uncollectible accounts"
minimize
balance
the
needs
damage of
the
facto actions
the LDCs
loans.
239
to be
drawn
loans
write-downs
with
on
the
is pressing
At
outstanding
into performing
stake are
debt
to
the
out
of
the
in order
the
the stringent
eligible for
criteria of
only
bank's
the
those countries that
federal
debt reduction plans.
IMF-approved
recapturing
government will
be
Countries which impose
economic reforms and can show they are
their citizens'
As published
meet
private capital
from abroad,
in the Wall Street Journal, the Bush
administration announced
in March 1989 that it was
supporting a proposal to
cut debt principal and interest
payments by 20 % to 39 debtor countries.
20
to
sheets.
As proposed now,
strong
the
expose the
concerned
stability of
for the outright forgiveness
banking
these goals
be pressed to accept de
economical
estimated
badly needed
for
the region.
failure
industry to
the
again open
83
will
entitled
be
debt
burden
being
presently
by
proposed
Washington.29
these new proposals from the
Assuming the details of
administration get ironed-out,
private capital
return of
measures to cut their
to use the special
Bush
any program that entices the
would be a valuable tool
to help
a country obtain such concessions.
flows
Restoring private financial
to the
region would have
banking
industry.
of
investment
the
Helping
returns
to the marketplace,
are more
will
their
the
stock.
LDC
with substantial
the
U.S. Strategy on World Debt Faces
Street Journal, March 13, 1989.
29
idea
important
and
capital
As a corollary to the
banks holdings of
Even though
is where the
loans and foreign
likely to happen.
reward the banks
the
credit worthiness
its
new
for
effects
may play an
locals
region regains
If
improvement of
to achieve it,
insurance for
role.
inflows
major positive
from nationals
debt,
price
the market
increases
proposed plans
of
of
debt
Hurdles, The Wall
Stocks of major banks holding large Latin American
the announcement by
portfolios surged March 16th, 1989 upon
debt
Treasury's
U.S.
the
of
Brady
assistant secretary
1989.
17,
March
Journal,
Street
Wall
The
reduction plan.
30
84
reduction would
imply
the banks would
exchange, through World Bank and
IMF guarantees,
acquire more credit-worthy debt and
less
by
likely.
the
loose some money,
Significantly, most
in
they would
thus make future
losses
losses would be absorbed
loan-loss reserve provisions already existing
in the
bank's books.
One element
for
is
the proposal
of
Latin
Although
this
for
the
idea
foreign deposits
is
aimed at making
Latin depositors and
flight, and
repayment
the Banks must
this plan,
watch
identify, and possibly tax on behalf
governments,
attractive for
capital
to
of
it
U.S.
U.S.
banks.
deposits
less
thus contribute to stem
thereby contributing
of debt,
in
to retain
can trigger
capital
exactly
the
opposite reaction.
Taxing only citizens of
innumerable problems.
Among the most
fact
that such
U.S.
constitution and as
citizens
of
developing
policy goes contrary
nations poses
obvious ones
lies the
to the spirit
of
the
such, could not be applied only to
arbitrarily selected countries.
it across the board would cause
(And applying
devastating effects
to the
85
liquidity of
effect
financial markets.)
would be eliminated
consistently
European
mangers
they
the
followed
banking
friendlier
by
the
Latin
brokerage
simply
shift
pastures.
their
Third,
the real
do not
have capital
Clearly
those
can
other
major
and
money
not stupid,
and
deposits
to
be
practically
the difficulty to identify
Deposits
in the
name of
are, and
that
legally
such
host country.
so called
tax-haven
It
is
nations
flight problems.
making the
tracing
accounts, William
Montreal
claimed
point of
the difficulty
Mulroland, CEO
of The
in the autumn of 1985 when queried
efficacy of
the bank regulatory
hide
in
money
investors
it
owners
accounts bear the nationality of
coincidence that
and
"tax-haven" nations guarantee the
corporations domiciled in
not by
are not
customer's
the true nationality of accounts.
whom
same policies
houses are
impossible to enforce because of
secrecy of
intended
Switzerland
centers.
at the U.S.
would
if
the
Second,
the
twinkling
apparatus stated:
of
an
eye
bloodhounds that can be put on the case, and
far ahead of them there would never
of
Bank of
on
the
"I
can
all
the
I would be
so
from
be a hope of unraveling
86
the
that
trail
this
I
sort
am not kidding you.
of
thing
can be
Technology
today means
done through
electronic
means.
Canada, Senate Standing Committee on Banking, Trade and
Commerce, Proceedings October 2, 1985. (11:24)
31
87
Implications of
Consequences and
Capital
Flight
For The United States
serious concern
is
There
U.S.
in the
the
for
stability of Latin America.
an
has taken such
Why the [U.S.] government
difficult to
not
crisis is
in the
role
active
grounds, Latin
On broad foreign policy
discern.
a region
as
regarded
been
always
has
America
From the
interests.
U.S. national
important to
was
there
began,
difficulties
Mexico's
moment
the
that
policy makers
among
doubt
any
never
just
States, rather than
the United
security of
States
that the United
-Mexico's. was at stake
or
serious economic
threatened by
would be
too
Nor
border.
south of the
political instability
was there any doubt that the contagion of disorder
nations as
other Latin American
spread to
could
ignore the
not
simply could
[The U.S.]
well.
backyard, which
own
in its
for chaos
potential
might be sparked by financial default.32
Without
since
the
doubt, U.S.
debt-crisis
administration
fears
Feinberg, Richard E.
erupted
has
trade
seven
that without
been hurt
years
easing
ever
ago.
the staggering
and Kallab, Valleriana (Editors)
and the Third World,
Banks
Commercial
Future:
Uncertain
Conn.
Brunswick,
New
Books,
Transaction
32
The
88
burden,
debt
might
Also a
the military right.
think
capital
that
financial
debt,
has fled
and
the
left or
economists
the return
of private
restoration
in Latin America is key
flows
1982
of
growing number
of Latin
reduction
a
have
which
by the radical
sparking takeovers
fall,
--
democracies
little or no economic growth since
receded or achieved
--
Latin
fragile
of
private
for continued
U.S.
estimates,
U.S.
economic growth.
By
forced
earnings
1982
the
market
third
quite
service
conservative if
region had surpassed all
goods and that
for U.S.
largest customer
crisis broke out,
commerce
to
and
of the
additional
real
estate
loans.33
but
Street Journal,
their
Yet,
this
that by
Western Europe as a
Mexico alone,
United States.
to
loosing export
in
the
March 13,
the debt
of
one considers
American
seriously damaged.
The Wall
since
devote ever more
Latin nations to
foreign exchange
figure can be
Journal's
lost $75 billion in exports
businesses have
crisis
Street
The Wall
1989.
became
the
Once
the
business,
south
was
89
Government officials never tired of
many
exports, hence
something
were
how
not
done
Washington's efforts
by Paul
for
jobs,
significant
political
gains.
would
troubled
to support these
stability could yield
and domestic
many
stressing how
be
lost
if
debtor
nations.
countries'
financial
foreign policy dividends
The motives were summarized
Volker:
The
effort
to
manage
the
international
debt
problem
goes beyond
the
vague
and
generalized
concerns about political and economic stability of
borrowing countries
.
.
..
The
effort
encompasses
also the protection of our own financial stability
and the markets for what we produce best.'3
The
best
were hurting.
trade balance
to a $11.7
fall
natural
in exports
turnaround
With
shifted
billion
markets
for what the
South America
from a $1.1
deficit in
combined with a 35%
largely reflects
* Uncertain Future:
page 115.
produced
the
surplus
surge
Banks and
in
U.S.
in 1981
a result of a
the LDC debt
Commercial
alone,
billion
1985 as
U.S.
imports.
9.1%
This
crisis.
the Third World,
90
us
give
yet
do not
figures
These
whole
the
picture of how much the Latin American debt crisis affected
U.S. trade
f uels and
mineral
U.S. will
of
economic p roblems
So
if
The presumption
loss
it needs
of
America
Latin
with
so to
it,
deduct
imports
of
is that
the
it
in
include
the
distorts
advantage or of
competitive
the
suffered by either part.
oil
is
the computations,
taken out of
in
the U.S. enjoyed a trade surplus with South America of
1981
billion, $2.2
$8.1
billion
in one year alone.
net deficit of
exports to
these
for
$1.2 billion
a whooping
This surplus
the region and a
$21.1
deteriorated
surge in
imports.
inflation;
suffered the drastic strains of
purchases
of
total
to a
in 1987, caused by a decline in
figures are not adjusted for
region not
basin and
the Caribbean
billion with
billion with Mexico,
$10.8
U.S.
trade
a true
picture of
its
if
trade all
balance of
lubricants.
import oil
balar ce
the
the
tally of
from the
the following reasoning, and
Consider
should have maintained
imports from the region.
a
Note that
so,
had
the
the debt crisis,
similar pace
with
Table 6
U.S. Balance of
Trade By Regions,
(Imports Exclude Trade of Mineral
1981,
in millions,
Fuels and Lubricants)
Region
Imports
Exports
2508
2508
3181
1468
7948
21914
8717
37324
39878
2641
819
7594
2910
7872
13934
8030
14781
12795
51672
21640
5179
920
5086
402
4691
12466
82
-7133
4078
14348
-18238
2538
101
128906
147327
18421
Canada
Mexico
Caribbean Basin
South America
37133
7007
4414
9539
39399
17780
6590
17675
2266
10773
2176
8136
Sub-Total
58093
81444
23351
186999
228771
41772
Africa
South Africa
Planned Economies
Middle East
Other Asia
East Asian NICs
Non E.C. Europe
European Community
Japan
Australia
New Zealand
Sub-Total
Total
Source:
Balance
author's computations compiled from the
1987 U.S. Foreign Trade Highlights, (1988)
U.S. Dept. of Commerce, Office of Trade and
Investment Analysis.
Table 7
U.S. Balance of Trade By Regions,
(Imports Exclude Trade
in millions
Fuels and Lubricants)
% Change
Imports
Exports
Balance
2229
2048
7984
3260
13958
61028
14386
80540
87982
2877
1180
4209
1281
5713
7970
8273
22856
8872
59731
27808
5467
814
1980
-767
-2271
4710
-5685
-38172
-5514
-20809
-60174
2590
-366
38.93%
-190.80%
-48.41%
37.78%
-6932.93%
535. 15%
-135.21%
-145.03%
329.94%
102.05%
-362.38%
277472
152994
-124478
-675.74%
64730
16541
5267
14039
59330
14569
7130
12948
-5400
-1972
1863
-1091
-238.31%
-18.31%
85.62%
-13.41%
Sub-Total
100577
93977
-6600
-28.26%
Total
378049
246971
-131078
-313.79%
Region
Africa
South Africa
Planned Economies
Middle East
Other Asia
East Asian NICs
Non E.C. Europe
European Community
Japan
Australia
New Zealand
Canada
Mexico
Caribbean Basin
South America
Note:
of Mineral
1987,
% Change column compares the Balance of Trade of
of 1987.
with that
Source:
author's computations compiled from the
1987 U.S. Foreign Trade Highlights, (1988)
U.S. Dept. of Commerce, Office of Trade and
Investment Analysis.
1981
93
one of
The region is decidedly
advantage of
comparative
that
during
other
key
pace.
billion
the U.S.
is evident
when noted
the
balance of
trade with
period,
the same
trading partners deteriorated
deficit of
to a
in 1891
from a surplus
Europe went
of
faster
at a much
a deficit
went from
example, Japan
For
geographical
The
States.
United
the
for
partners
trading
the best
$60.2 billion
of
$18.2
in 1987.
$8.0 billion to a deficit of
$20.8 billion!
both the
a
have
return their
a
as
U.S.
particular,
point made from
the
So,
to gain
assets to their
to
In attempting
confirm
realistically be proposed,
if
coverage
is
the banking
whole, and
lot
feasible by
if
local
countries
if an
the
these chapters
industry
in
America.
solution
next chapter will
studying actuarial
that
entrepreneurs
in Latin
insurance
is
can
establish
country risk
analysis, what type of entity could provide coverage and at
what cost.
94
Chapter 2
An
Insurance Solution to Capital
At the
in
political
risk
insurance
players:
several
institution
protection
feasibility
of
to
providing
investors in their
own
be
determined
for
government
involved,
the
local
has
The host
to
investor's
the
and
government must accept the
special
in order to maintain retained earnings
locally.
launching the
insurance profitable
The
an
require an advantage or
institution
scope.
the
coverage
providing
thesis that some citizens
risk
I
host
the
insurance.
purchasing
The
my research
The feasibility
countries.
placed
of
beginning
establishing
emphasis
Flight?
program must find
its
overall
the program and
find it
with
or congruent
investor must accept
political
attractive.
This emphasis
directed me first
into establishing
the
potentiality of accurately measuring country risks, as
this
was the key to set premium rates.
The second step was
95
to analyze
that such coverage be provided by
the likelihood
of
companies,
the
U.S.
multilateral
institutions were
last
this
step
Following
considered.
and
banks
private
government,
and
The third
the investor's attitude towards
was to establish
program.
insurance
Private
institutions.
types
different
of
the development
is
each
of
these steps:
Country Risk Assessment
providing political
any entity
reasons
its measurement
quantified manner.
are
both
economic
a
consequence
This
linked to the inherent
or quality of
measures
the
and a
exact
risks
financial
interdependent
and
relationship,
subjective evaluations needed to be
elements as "political
bureaucracy" 35
of
this evaluation a most difficult one.
As measured by the
of
many
For
impossible in an
cause
for
area
The main reason is that political
problems.
done when one
crucial
insurance.
risk
totally
is
a
is
Determining country risk
International
leadership,
one country, make
Private
Country Risk
for
and public
Guide
96
entities have
developed different
factors,
giving
assumed
relevant
numerical
values and plugging them
that
produce
measuring
ranking
stick.
indices
means
of measuring
evaluations
these
into mathematical
usable
as
all
a
models
comparable
Statistical Modes of
Sovereign Risk analysis
literature,
In academic
to estimate
models
default.
Put
simply. the problem
Probability of Default
If
researchers
influence
could
be able
with the purpose of
of
default.
=
to the
procedures
the
independent
or
probability
of
is to estimate:
f(economic variables)
identify
probability of
analysts would
variable,
influencing
variables
explanatory
the dependent
significant
the
identifying
of
statistical
by debtor
statistical
applied
have
researchers
as
latter
of
default
of
the probability
Treating the
nations.
problem
the employment
risk consists of
sovereign
the analysis of
default
to tract
economic
on
variables
sovereign
that variable
identifying the countries most
that
lending,
over
time
at risk
98
representative
following
the
identifies
Heffernan"
list of explanatory variables that
tested for statistical significance
have been
in predicting defau lt:
Current Account Variables
Debt
service
Ratio
Service
to
payments
(DSR): ratio
value of
the
of
external
debt
goods
and
of
exports
services.
Ratio of
External Debt to the Value of
Services
(D/Ex):
Goods and
that
the
for
external
the denominator is
the
DSR and
numerator
Exports of
the same
as
consists of
total
this
ratio
sovereign debt.
Ratio
of
Imports
attempts to capture a measure
to cutting
the degree
*6 Heffernan, Shelag,
& Unwin, London
of
to
(IM/GNP):
flexibility when it comes
import bill.
back on the
indication of
GNP
to
It
also provides an
which national
income
growth
(1986) Sovereign Risk Analysis, Allen
99
should a country have to reduce
will
be affected
bill
in response to debt
Ratio of
and Services
Goods
(RES/IM):
Growth Rate
correlation
negative
probability of
is an
this ratio
Imports
of
indicator of
Some researchers express
it
can expect
a
earnings
higher
of Exports
between
one
(GEX):
this
variable
and
the
rescheduling foreign debt.
Variance
the
Reserves to the
International
of months.
in terms
export
import
servicing difficulties.
liquidity problems.
short term
its
in
Export
reduce
Earnings
(VAREX):
stable
the probability of
defaults, thus
the
probability of
the variance,
the higher
defaults.
Ratio of Current Account Deficit to the Export of
Goods and Services
indication of
given year.
(CAX):
this
ratio
is meant to provide an
the country's new borrowing requirements in a
100
Account Variables
Capital
Ratio of Capital
capital
exchange
external
this
debt.
There
is
to
country's
the
a negative
foreign
servicing of
the
turn ease
(K/DS):
relationship
between
variable and sovereign risk.
is
variables
this
which in
receipts,
Ratio
this
contribute
inflows
to Debt Service
Inflows
to
of Amortization
probably the most controversial
employed in statistical
Debt
External
all
of
(A/D):
explanatory
The inverse
models.
of
ratio is supposed to represent the average maturity of
a country's external
debt.
Commitment per Capita
of new debt
this
(C/POP):
contracted during a given year
is the ratio
to population.
Other Variables
Ratio of
(RES/D): expressed
International
as a
Reserves to
percentage
of
total
External Debt
outstanding
101
debt,
default
declines.
Per Capita
of
a country's
ratio
as this
external
Income
greater flexibility
Share of
thi s
indicator signa
country:
one
thi s ratio as a
good
by
the
Ratio
indication
of
(Y/GNP):
living standards;
greater the consumption of
the
rises,
probability of
is and indicator
this
the higher they
non-essential
are,
goods, making
the
for
in the adjustment of consumer patterns.
nvestment in National
Income
(I/GNP):
s the
importance placed on investment
should
look
for
indicator of a reduction
of External
foreign
Debt
claims
increase of
a steady
in risk.
gives
an
to GNP
(D/GNP):
on
debtor's
country
GNP
(RES/GNP):
like the
this
is
a
production.
Ratio
ratio
of
liquidity.
of
Reserves to
reserves to
imports,
an
indicator of
102
Monetary
identify countries with
which makes
them
less
inflation,
which
in
world
markets
try
indicators
these
Indicators:
to
strict money supply growth targets,
of domestic
likely to suffer problems
them
turn makes
and hence
to
prone
competitive
less
balance
of
in
payments
problems.
World Credit Liquidity
supply
side variable:
(L ): attempts to capture a
the degree of
credit abundance
in the
world economy.
Ratio of Domestic Savings
with a
of
high
external
savings ratio will
financing
an indicator of how quickly
providing a
economy.
less
(S):
a
country
dependent on forms
in the future
Econo mic Growth
Per Capita Rate of
thus
be
to GNP
measure
(G):
this
is
per ca pita incomes are rising,
of
the
general
health of
the
103
A Practical Application
Let us
concepts
are
look
applied
Insurance Association.
provides
country
world.
Government agency
operating,
country.
or
investing
friendly nation,
a
exporters
is the
to any
independent
U.S.
facilitate the
services.)
lending
U.S.
whi ch allows
are
made
is
to a
government
it
of
citizen
entity,
a poor ranking being
the same must
to
have
FCIA's
to
that
the
given to a
and
independently
Eximbank.
of Eximbank, and
commercial banks,
given
be kept confidential,
diff icult because FCIA
perspective from that
many
U.S.
to finance and
rankings match those of
This
from
(Eximbank
implications of
efforts
Foreign Credit
is a division of Eximbank that
deve loped a system
But in
political
The
how these
accordin g to the political or economic risk
rank countries
obtained
FCIA
that helps
FCIA has
great
practice at
American goods and
export of
of
in
insurance to
credit risk
in the
at one concrete example of
has a
different
probably different
mainly because
the
term of
104
not the
exposures are
their
receivables that are short term
is the
concern
their
of
This system
internally.
and
its debt within
indices
is based on
ranking countries
that
are
calculated
and
balance
of
-
foreign
currency reserves,
-
the ability to
capital
payments,
raise capital
in
the
international
markets,
dependence on one commodity to
generate foreign
exchange,
-
priorities to provide foreign exchange
for
certain
imports versus others,
-
As
FCIA.
political
stability, and many others.
a
compounded
Among them are:
-
-
so
twelve months.
the course of
of
country,
this
of
mainly
twelve months),
the buyer, to be able to service
naturally,
series
(one to
likelihood
insures
FCIA
same.
7
per interview with Byron M. Shoulton, Economist at
105
major
weight than
the others.
With this information
FCIA's staff
being the
on a scale from one
each country is
A,
as
B,
C,
put into market
D and
without
This would
or
identified
then actuarialy
is
insurance coverage.
would
group countries
balance-of-trade
or
One
Then
the most.
being
groupings simply
the highest ranking,
balance-of-payment
by
ranked
to ten every quarter.
Each grouping
E.
assigned a different premium for
"A",
each country is
credit worthy, ten
least
necessarily a
index has
or measurement
one variable
Not
problems.
include countries not dependent on one commodity
industry.
Germany, Japan or the U.K. would fa 11
in this
category.
The "B"
all
is
identified as
areas, except having one or
a weak
this
category
financial
category
Singapore.
two problems,
sector one might be
would
fall
satisfactory
countries
for exampl e,
concerned about.
like
in
Taiwan
In
or
106
For example
transition.
oil
is
"IC"t market
A
are
prices
and they
low
payment
problems.
economy
would be
here
confronting balance
are
specific sectors
(Sometimes
given this
fall
Arabia could
Saudi
country in
as a
by FCIA
seen
the
ranking, and
of
if
of
the
government
itself a higher one.)
markets are countries
"D"
servicing
it
fall
under
In
all.
an
to borrow heavily.
problems
problems
debt and facing structural
exterior
its economy forcing
nations
with serious
in
Most developing
this category.
"E"
market
no
Nicaragua or Peru would
coverage
would be offered at
in this category at this
fall
date.
In order
relies
also
on third
evaluations.
One of
Country Risk
Guide
Reports,
breakdown
Inc.,
of
parties,
internal
that
(ICRG),
a
publication of
a
detailed
comparative
risks
rankings FCIA
prepare
them, published by the
provides
the
its
to support
independent
International
International
country-by-country
of
operating
in,
107
investing in,
or
three-dimensional
lending to
particular countries using
evaluation system.
it provides are broken
The main risk ratings
The
three.
first one,
measuring Political
down into thirteen political
then
factor
assigning each
detail
of
these
the disaggregated
and economic risks by an indicator.
financial
political,
system attempts
This
the composite risk, and express
to weigh
indicators
is broken
each
country,
indicators for
a weighted
is
Risk
point
presented
in
value.
A
Table
8.
Indicators
-
Points
12
economic planning failures
12
economic expectations versus reality
-
political leadership
external conflict risk
corruption in government
military in politics
- organized religion
in politics
-
law and
-
racial and nationality tensions
-
political
civil war
-
political party development
quality of the bureaucracy
order
tradition
terrorism
risks
in
Risks,
Table 8
Political
a
12
10
6
6
6
6
6
6
6
6
6
100
108
The second rating, Financial
five
indicators
of
financial
assigned
to
risk
values
country.
A detail
Risk,
performance
factors
of these factors
is broken
with
identified
into
weighted
for
each
presented below in
is
Table 9.
Table 9
Financial
Indicators
Risk
Points
-
loan default or unfavorable loan restructuring
delayed payment of suppliers' credit
repudiation of contracts by governments
losses from exchange controls
expropriation of private investments
10
10
10
10
10
50
The
economic
country.
last
rating, Economic Risks,
indicators that have also been
Table
10
lists
these
encompasses six
identified for each
indicators
in detail.
109
Table
10
Economic Risk Indicators
Points
10
10
5
5
15
5
inf lation
debt service as a percent of exports
international liquidity
collection experience
current account deficit as a % of exports
foreign exchange (parallel market indicators)
50
In calculating the aggregate political
and economic risk,
the
following formula
CPFER (country X)
= 0.5
financial
is used
(PR+FP+ER),
where CPFER
= Composite Political,
Risk rating;
and
Financial
and Economic
PR
= Total
Political
Risk indicators
FR
= Total
Financial
Risk indicators
ER
= Total
Economic
Risk indicators
110
(theoretically 0)
For
indicates
more
general
the
the highest
be
100)
score
lowest
risk.
purposes, the
particular countries can
value of
(theoretically
and
risk,
lowest
the
indicates
rating
highest overall
The
individual
estimated using
risk
the
following fairly broad categories:
85.
to
100
points
Low risk
70.
to
84.5
points
Moderate risk
60.
to
69.5
points
Moderately high risk
50.
to
59.5
points
Very high risk
00.
to
49.5
points
Very
low risk
these
with
Even
experience of entities
risk
assessment
the
has
measuring
like FCIA in
been
losses
mixed.
can
that
magnitude
of
country's
economic and political
lets
look at
the case of
Mexico
systems,
this area of
To
be
the
past
country
understand
the
caused when
one
systems are
in distress,
in the 1982/83 years.
111
For
million
of
out,
the underwriters and re-insurers of
of
Eximbank to pick up the
forcing
underwriters
The
area.
political
commercial
carrying the coverage of
as
FCIA is,
16
for
them,
its
customers
countries.
to
have never
date,
country exposure.
the
basis for
transactions '.
percent
they
also
They
of
agreed
continue
to
risks.
in
the U.S.,
even
and
risk has been
from
this exposure, FCIA requires
To hedge
that
in the
risk coverage
political
the
sharing any part of
unattractive.
FCIA to pull
its name suggests, an association of
insurance companies
largest
the
convinced
claims
these
of
size
the
profitability,
several
So even after 24 years
losses during that year.
in
$380
over
for
caused
alone
FCIA, Mexico
on
imposed
Such a
paid-in capital
total
of
a country limit
is
risks
limit could
and
limit
themselves a
The establishment of
limiting the
customer, but
limits per
impose sub
several
in
risks
spread their
be
of
border
cross
expressed
reserves to assure
as a
that
in
Krayenbuehl, Thomas E. (1985) Country Risk: Assessment
se
D.C. Heath Company,
and Monitoring, Lexington Books,
Lexington, Ma.
112
the
event of
a catastrophic
loss
in
claims could not carry the organization
one
country, major
into insolvency.
113
Insure Political Risk
That Could
Entities
Private
Insurance Companies
In the
market
or
political
address
at
question
conceived in this
covered
insurers,
banks,
will
institutions
sizable volume,
outcome
able
be
or
governments
such big
to take
have
a real
revitalizing
of
success
and
is
It
today.
though all
even
the
that
poses a new type of
thesis,
being commercially
private
is
all
the
form of
some
reason
to
program,
as
The
insurance.
risk
sovereign
the
provide
entities that
government-controlled
and
private
many
exist already
risk from any
uncertain
if
multilateral
risks
stake
in any
in the
economies
of
sector,
and
(AIG)
or
developing nations.
Entities
of
Lloyds
Citicorp
like
London,
of
American
International
from the private one,
OPIC from
programs
Group
Insurance
Corporation
(CITI)
have been providing different
forms
Trade
sovereign and political
Their
the public
Indemnity
risk
insurance for many
years.
to cover
foreign
are available and designed
114
"off-the-shelf"
existing
Although private
insurers do
not
coverage on a case by case basis, CITI's
coverage entailed
For details of
country.
a
copy
sample
the
of
quoting
officers explained
risk
completely different
in
investment
foreign
a
the risks covered, please refer to
policies
Indemnity
Trade
International
a
insuring
posted by
that
possibility
rule out the
request they would consider
given a concrete
than
Latin
a
insure his exposure in his own country.
to
that this
to
offer
to
product
citizen wishing
that
them though, have an
None of
assets of domestic companies.
Citicorp
by
offered
included
Corporation
in
Appendix 3.
Richard Stern, Vice President and General
for Citicorp
on the
Insurance explained
issue of
seeking of
Counsel
that the difference
leverage on negotiations
of
compensation from a government.
nationalization of a domestically owned
claims
For
bank or
lies
and the
example the
farm
in El
Salvador would not disturb good economic relations with any
foreign government.
country,
repayment
Acting under the
(if
there
is one),
legal
system of that
can be in
the form of
115
currency.
term
long
worthless"'
The
the
compensation,
much
Dollars.
It
pressure
from
party
is a
to
less expect
the
media
Thus,
countries constituted
of political
risk
laws of
insuring
for the
for
no
it has
to
leverage
it
fair
in
there
U.S.
any real
be no
will
because the
affected
the country effecting the
in
citizens
their
insurance industry
which
local
provide
receive
and
foreign governments
subject of
in
issued
supported by
to be
cannot expect
expropriation.
type
authorities
local
the international
in
outcry
party would find
insured
influence
to
bonds
government
little or
own
"new"
a
no actuarial
experience exists.
Byron
Commerce
Insurance
of a claim, the
it would
Shoulton,"*
at
economist
Foreign
that
in the case
pay the
insured and
Association, confirmed
insurance company would
the
have a recourse against the host country by
taking
Depending on the
issuing government, market conditions,
terms, and the currency of issue, the market resale value of
cents on the
these debentures has dropped to as low as 3
Dollar.
Byron M.
Shoulton, economist at the Foreign Credit
Insurance Association
40
116
possession
If
offered.
whichever
the
insurance company believes
it can
adequately compensated,
a suit.
file
But the problem
no authority to enforce
verdicts.
the
On
hand,
other
supported
by
all
sorts
of
organizations
multilateral
their
than
not,
the
being
entity
european national,
the host
government
pressure
political
all
and
The pressure seeking
channels available to them.
diplomatic
to obtain
compensation in a hard currency wouldn't be questioned
the
investment pro bably was
as coming
in to the
It
first place.
probability of
the
if
claims against
the process of ensuin g
as
court has
concern over
often
to be owned by an
nationalized happened
fair
courts to
tend to ignore these verdicts.
governments
would be
not been
Other than effecting
more
images,
international
or
through
its
here is that this
been
have
it has
to the world
go
pressures and the governments'
political
public
might
compensation
of
first
country in the
is easy
of
same currency
there
to imagine that
obtai ning compensation
example,
mentioned above.
recorded by the central
the
investor
in
is
bank
in the
little
hard currency in
from
El
Salvador,
117
As compared with other entities, private insurers
not enjoy
they did
felt
favorable negotiations
country
provided,
they
held no
expected result
of
of
means of
a
than removing
Other
where
coverage
exerting pressure.
measure was
a
such
to secure
leverages
nations
influencing
in
inconsequent
claims.
of
list
the
from
any special
considered
a
is
The
to
be
decision to
government's
policy or to provide
adequate
alleviate this concern,
insurance
carry out a nationalization
compensation afterwards.
one way to
As
companies would
governments of
The
coverage.
like
how
to
accepted to
of
like to subscribe agreements with the host
establish
properties and,
as compared to all
country.
such
United
exchange rates;
mechanisms
provide
time on matters
arbitration courts
of
market value
the seniority of
their debt
previously acquired commitments by
(Please refer
the
for a copy
of
one
between the Governments
of
the
Appendix 4
to
agreement subscribed
States of
of
for appraisal
if possible,
to
are
they
is to agree ahead
idea
both;
before
nations
the
America and
Costa Rica
relating to
the
118
Private Investment
the Overseas
guarantees of
investment
Corporation.)
issue of Latin American governments
Regarding the
granting a different seniority to
de
Heras'1
las
special
grant any
privileges
that have been forced to
of
rescheduling payments
--
have committed
them not to
new
lender
is
to
not at
insurers.
all
possible to
countries
All
renegotiate their debt in exchange
and this is almost all
--
to several
points.
One of
of
them
which binds
grant any superior seniority or guarantees to a
without offering the
is known
This condition
ones.
it
that
stated
insurance company claims,
same benefit to
as the
existing
"negative pledge
clause."
When
senior
claims
asked
if
it
would be
possible
to obtain
on a country's assets abroad as compensation
for an insurance claim, Meneses42
explained that no one has
Gonzalo de
las Heras, Senior Vice President at Morgan
Guarantee Trust Company, responsible for foreign lending.
41
Victor Meneses, Senior Corporate officer for Latin
America and Africa at Citibank, a subsidiary of Citicorp.
42
119
a
claim on
Bank or the
International
Monetary Fund
so
there
debtors are
"pari
treated as such,
passu,"
Countries do
Bank before
tend
in
basis 4 3 .
outstanding not
accrued
(In
fact this
yet overdue.
nations from
is not because
loans
billion
the $127.9
figure includes
principal
Past due
outstanding.
Latin America
June
example, as of
For
interest represents one half
whole portfolio of
World
the
a non-
to developing nations were in
loans outstanding
all
they are not
IMF or
but this
they pay private banks,
to this,
equal.
1988 at The World Bank only 2.3% of
accrual
due
all
pay the
to
they have an obligation to do so.
30,
practice
though in
legally they are
doing
Theoretically
seniority either.
is no official
sensitive
Additional
the constitution.
would be against
on a
lean
in many countries
and
about hypothecation of assets
have a
are very
Countries
assets abroad.
country's
Not even World
abroad.
any country's assets
of
principal
plus non
one percent of
Included among
were Peru,
the
past
Nicaragua and
Financial Statement, International Bank for
Reconstruction and Development (World Bank) as of
June 30, 1988.
120
This
Panama.)
World
is
Bank
extending new
all
practicall y
only
the
stop paying everyone else, but
still
financing
if
So countries simply
loans are not up to date.
previous
institution
not disburse new
policy will
the
fact
the
in the region, and that
loans and ref inancing
of
as a matter
reflects
outstandin g record
manage to stay current with
The World Bank.
The
programs
come
for
at no
cost and no
The source of
think
get
the
and
fought
Flossible adverse
government
Mexico,
to enter
Mexico
resisted
effect to them.
for example, will
t he
host
though they
by OPIC, even
the problem s tems from traditional
American mistrust.
U.S.
off ered
the ones
like
have even
example,
on
claims
Many countries,
a complicate d one.
government is
and Brazil
of
le verage
of
issue
not
Mexican courts,
U.S./Latin
allow the
Brazilians
they should not be re quired to sign an OPIC treaty to
U.S.
investment
ther e.
So
there
'en something
undercurrent which makes evs
to sell.
is a
political
like OPIC difficult
121
kept
this
Again,
banks.
to private
happening
is
but have chosen not
So,
suicidal
that
considered
in
this
facto" and not
official
the case of
to
foreign
to court on
this issue,
and
politically
government,
of
investment
thesis,
in
an
insurance such
will
offer
hand, no support
should be
government regarding official
expected from
sequestering of
foreign government is not performing on
to
effort
as the one
in
and
an insurer,
fact anybody, any superior claims on its assets.
other
debt
World Bank,
discourage
unlikely
highly
country's
attract a program
"de
to do so.
is
it
a
not
banks could go
U.S.
investment.
like in
order
in
is
in
superior
is
on private and
interest or principal
but not
region
keep coming out of Argentina,
example, dividends
For
equity
this
But again,
to debt.
seniority
law.
governments)
Latin American
the
of
and out
in a peculiar pragmatic sense
So
without any restrictions.
(for
in
been coming
have
investments
their debt,
struggled restructuring
countries have
Latin
the time
So during
debt problem.
separate from the
been
investment flows have
is that
The reality
On
the
the U.S.
accounts if
a
its agreements with
122
has
assets.
The well
precedent to
the government
it
case,
was
a
it does not constitute a
issue and
the hostages
of
place
took
Iran, that
In that
orders.
owned
nationalization
extreme case where
ago was an
reaction to
the
known exemption of
presidential
acted on
U.S. government
(a
to
due
lost money
entity)
a few years
OPIC
even when
case,
been the
has
suggests that
Meneses
an American insurance company.
be taken into account for political
insurance
risk assessment purposes.
de
to
According
las
the
Heras,
cannot pay their debts
their
recourse
would
lie
claims?
for
they
if
nationals
to anyone --
be
Why should they
governments.
foreign
cannot
Recourse claims
all
seemingly
American countries who
look at Latin
practical
it private banks or
offer
to
expect
against a
purposes,
for
coverage starts
insurance companies providing this type of
when they
problem
in
insurance to
collect
on
government,
third
place,
agreements and the already
existing
private and public debt to banks and multilateral
entities.
behind the Paris Club
And,
as mentioned before, most developing countries are not
paying even them!
123
insurer
private
political
to
bear
to
these risks alone, and
the government for a
type of
region
the
outside
government
this was so,
a certain
it would have
to be a
have
to
order
in
not be
look towards
would
joint venture, a subsidy or
If
guarantee.
unlikely.
highly
sector would
the private
suggested that
Shoulton
it is
if
particularly
seems
investors,
local
a
coverage for
underwrite comprehensive
risks in Latin America, and
include
willing
to
convince
to
being able
of
expectation
The
any
credibility in the market.
Another
the
reason
the
the
most
That is
government-operated
to seek out
insurers
political
to provide
the existence
insurance
stems
risks,
important barriers preventing
business.
subsidized
for
private
before attempting
the government
help of
comprehensive coverage
of
for
of
their entry
OPIC
schemes, that
insurance, make private
from one
by
into
and other
offering
insurance unprofitable.
other instances of market distortion, it is
As in
buy
insurance buyers to
best interest of
in the
rate.
market
the
below
priced
it
is
when
insurance
countries
across
is uniform
rate
OPIC's
Since
124
it
operations),
manufacturing
for
0.6%
(e.g.,
nations (mostly
in risky
pays to insure
clearly
Thus
low-risk nations.
not insure in
LDCs) and
problem of
with the
faced
plans are
government
adverse selection.
outside
investors with assurances
their
repatriate
prerequisite
coming
insurance
will
change the
desire can
moment.
these assurances because they
are the
require
with
their minds
in
these
is needed because of
change
they so
any
investors
Even
in.
if
investments
original
Governments provide
region provide
that they can freely take
over time, and
out their dividends
the
in
governments
now,
Right
or
at
the first
place before
government
guarantees,
the high risk that officials
that
the
ideologies and policies of
countries entirely
their governments.
Shapiro, Alan C. (1982) Multinational Financial
Management, Allyn & Bacon Inc., Boston, Ma.
4
125
Private Banks
At
comes
mind to
to
themselves.
provide
Not only
increased investment
ones
the natural
first thought,
to hold any
do
in the
leverage to
this
institution that
they have
banks
is the
insurance
to
most
region, but they
gain from
are the only
enforce a claim against them.
in
banks
of
advantage
comparative
The
LDC borrowers is further
enforcing contracts with
a
and, to
the IMF
role of
the
strengthened by
Both institutions
the World Bank.
lesser degree,
they represent a continuing
have leverage because
finance and because they play a special
source of
in signaling to other financial institutions
role
whether to stop lending to a particular country.
I am
lending to a
honoring
its
presuming this
leverage
country can be stopped
international
stems from the
if a government
agreements.
experience, they have the clout and they
fact
is not
Banks have
the
have the financial
Lessard, Donald (1985), International Finance for Less
Unfulfilled Promise, working paper
Developed Countries: the
1985 World
presented to World Bank as background for the
Development Report.
45
126
Banks can make or break a country.
interest in the region.
As
it
will
be
the
in
seen
next section,
the
measuring factors to establish
ability of
a country to access
markets.
Such
markets
funds
simply
of
country
investors
the
risk,
is
the
in the world financial
dry up
if
a
country gets
by the financial community.
"black balled"
The problem
offer private
of
potential
for
and one deciding criterion
level
one
for another type of
insurance coverage
fact private holders of
organization
in the LDCs
debt or other
stems
type of
to
from the
investments,
as
insurance contracts would be, do not obtain similar
help
in
the enforcement
Further making
the
case for
of
private banks
their
offering this
the previous experience of
other countries
the
of
case
of
the
U.S.
that have attempted
the
to react
difficulty
insurance coverage
is
government and that of
to impose sanctions
Usually,
expropriations.
mechanisms designed
because
claims.
the
in
sanctions or
to
these events have
failed
of
establishing damages
and
127
and
fault,
assigning
response required to make
that
In as
that
it would
indu stry.
into
The
taking
ques tion
ma tter.
scheme achieves
the banking
support of
would translate
support
providing
the coverage
As a senior corporate
Being
risk directly.
very
limited.
inve stment
would
private
air eady,
be
well
not consider
is
officer
th eir underwriting
it,
improving
as the quality of
banks may well
Lessard, Donald
to support
assuming it
this project
reflow of
tho se
economies
bank's debt.
fund such a project as
(1985)
capacity was
a
gets
the quality of
the
any of
view, making an
point of
e quity basis)
worth
carrying
a fair amount of
th e holders of
From the ban ks'
(on an
capital,
as well
4*
that
banks as su ch would
U.S.
the country risk
private
flight slowed down or
Latin America and Africa at Citibank, Meneses' view was
that
the
if
direct e xposure by
comp letely another
for
enjoy th e full
bankers
interviewed
t his insurance
mu ch as
reve rsed.
goal,
to see capital
like
would
they
collective
the penalties effective.
consensus among
There was a
the
obtaining
hence,
"Furthermore,
long as
it is
128
third
promoted by a
be kept
can
banks, and
party not directly associated with the
legal
Serious
the
existing exposure of
are not a
believe banks
industry as
loss
The
operations.
only
With the
a
small
existing
underwriter, unless
of
percentage
levels of
this industry, far exceeding healthy
doubtful
the
If
a
third
party
gets
probably provide their
let
a
total
its
exposure
held by
market will
potential
of
magnitude
bankrupt an
me to
lead
to undertake
realistic alternative
losses may
is
a group,
already
levels,
them bear additional
program
the
with
coupled
limitations,
project independently.
expropriation
that
Meneses
stated
interview.
during
this
length,"
at arms
started,
support, albeit on a
banks
it
is
risks.
will
limited basis.
129
The U.S. Government
government's
branches that are
development
of
capital
Director of
of
flight
feasible
as
enthusiastically
the
Bastian,
Department
it possible for such a program
branch
by some
provided
Walter
one.
Basin Program at
the Caribbean
Commerce, even considered
to be
promoting the
in
they
America,
Latin
U.S.
idea of an insurance solution to the problem
considered the
of
involved
the
of
officers
interviewing
When
of
the
U.S.
government.
Bastian deemed it would be politically acceptable to obtain
support from Congress for an insurance program, even though
he
funds
recognized
tightened
for
perceived
having
as
difficult to sell
the dual
the
the
own
program
were
being
due to the budget deficit.
Any program that
is
his
government
one, would
be
politically
very
in the context of Congress' fight against
budget deficits.
reaction of
the taxpayer, or
has a cost to
It
is
not difficult to imagine
the media and that of
advises
domestic
local
stakeholders
farmers
that
if
their
130
municipal
closed,
of
investments
strengthen U.S.'s
possible
trading partners to
long term benefits of
politically
the south, and
it
would
feasible to support a program of
direct
to believe that
guarantees to an entity underwriting coverage.
needed,
removed
from the
world, and
benefits
look
country
is
to the
looking
the small
U.S.
for
inwardly to
own multitude of problems.
Even though
The
nations of
leadership.
find the
until
budget item
to the country are
voter's perspective.
in particular
basin,
as a
accounted for
the potential
providing
Not even one
insurance by the U.S. government.
guarantees are not
the
this program to the nation.
leads me
This argument
not be
made to
it
sense
much
would be
It
Latin America.
in
matter how
no
to guarantee
presents a program
rich
the
suicide,
political
receiving reduced amounts
governments are
funds and now
of Federal
to be
have
military bases
be curtailed,
will
subsidies
too far
rest of
the
the Caribbean
But
solutions
now the
to its
131
Organizations
Multilateral
that may be
considered
for all
this service
Guarantee
to attract foreign
the
purpose
by
manage to
process
is to encourage
alleviating
risks.
keep
economic development and
in de veloping nations
loca 1
one
concer n
about
Miga intends to carry out t hese
guarantee
assistance
mediation
operations, provisions
to
and
governments of
consultation
Miga's
non-commercial
goals by investment
of advise
LDCs .
on
there).
(and in
in developing countries
investment
investor's
to
international
that
recogniz ing
investment
opted
Investment
the Multilateral
needed to achieve
is
cooperation
the
The World Bank approved in
directly.
(MIGA),
Agency
Bank
World
the
is
insurance
Presuming
flight,
creation of
1988 the
of
April
politically and economically viable
involved.
capital
for
solution
provide
parties
the
the
last alternative
one particular country is the
citizens of
protecting
of
specific intent
the
insurance without
agency, providing
multilateral
international
An
It
will
investment
and technical
also provide
policies
and
132
programs among member governments, and between them and
business community.
international
Previously di scussed ev idence
program.
technica 1
problems sur rounding
banker's ,
or even
interven tion
make
not
MIGA was
without knowing
opted
to
of
relevant
local
to
point
for
to
who
inves tors
to
in order
in achiev ing
its
indicates t hat
The
could,
in
the
private
direct
these enti ties
to
started,
conclusion was derived
e 1 iminat es any
should be
motivations of MIGA,
effectiveness
as
th is
plans.
the ir
create MIGA,
continue specu lation
insuranc e
and
in operati on,
guarantee
a
t his research was
When
like it
government's
U.S.
unrealisti c
it
such
private insurers,
the
wor se,
such coverage.
provide
of
underwrit er
logical
the
be
entity
Bank or a multilateral
Only World
could
the
Bank has
fact World
r eason to
further
or should,
Latin
understand
The
America
the
goals
to speculate on its
intended
provide
goa ls.
and
possible
133
Chapter 3
The
Investment Guarantee Agency
Multilateral
As of
establishing MIGA.
signed by
Christophe
agency's
S.
board
the
Bellinger,
guarantee
just
approved
had
the convention
74% of
1,082,000,000.
of U.S.$
the convention
countries, to
January 1989,
obtaining
of
process
nations totaling
73
authorized capital
in
member
its
ratification from
been
is
Bank
World
the agency's
As expressed by
MIGA, the
officer at
the
underwriting
insurance coverage, though none had been sold yet.
Mr.
has
of
It was
Bellinger's function to seek eligible projects in order
to start operations.
7
Scope of Guarantee Program'
The
determined by
scope
of
"eligibility
MIGA's
guarantee
requirements"
--
program
tests
which
Taken from MIGA's Investment Guarantee Program general
information booklet published by MIGA itself.
47
is
134
investment
if and
must be met
These tests
for coverage by MIGA.
in which the
the country
time and
is
in
relate to
the
investor,
the
risk against
type o
the
principle
located,
to b
is
investment
investment, and
type of
to qualify
which coverage is sought.
Investors
Eligible
To qualify
be
which the proposed
of a member country if
a national
conditions are met.
place of
the majority of
member
is made
investment
First,
business
its capital
it
country).
is considered
either of
in
For
a as
the following
has
is incorporated and
in a member country, or
stock
one
than the
(host
this test, a corporation
the purpose of
principal
country other
a member
nationals of
investors must
for coverage by MIGA,
is owned by
its
second,
nationals of
countries.
As
coverage
is
domiciled
in
a
result
available
a
country), as well
member
as to
this
of
to
(other
MIGA
corporations
foreign-owned
country
test
alternative
than
companies established
the
host
in a
non-
135
member country
Eligible
countries.
Publicly-owned corporations
if they operate on a commercial
basis.
the prospective
host-
government, eligibility can
host country
the
to
host
who plan
also be extended
country nationals
MIGA's guarantee protection
For
also provide coverage to offshore
their
country nationals
own countries.
should
investors
guarantee
protection to
countries
who
country.
this purpose, Miga may
funds through
investment
recycle
flight capital
into
Note that MIGA's broad delineation of
qualified
jointly
encourage the
to
is designed
repatriation of flight capital.
which host
nationals of
investment assets
to transfer
The extension of
from abroad.
by
on application
Also,
private
both
include
investors
individuals and corporations.
qualify for coverage
member
by nationals of
but majority owned
enable it
those
finance a
afford uniform
to
investors
project
from
in
different
a developing
136
Eligible
Investments
Eligible
investments
investment pr oject is
used
contributions
include
only
countries
where
the
located in a developing country.
New
member
between
investments
new
MIGA can insure
for
re structuri ng of
eligible.
Investmen ts
in
coverage.
Investments
for
kind;
ex ample,
for
se rvices,
technical
marketing ser
vices.
guarantee is
this
new
project
form
credible
the currency for which
operations.
In addition to this,
host country's
coverage
stemming
individuals overly
from
a
provide a
and
MIGA
to
falls
existing
I contend, this fact alone will
originating
from
patents,
trademarks
investments,
comprehensive
investment in the area, and
prevent
made in
issued.
providing
of
short
know-how,
currency
can be
machinery,
Applicants must
insuring only
By
also
of
the form
managerial
usable
freely
any
non-monE tary assets in
valuation of
the
in
or
an existing enterprise are also
financial
qualify
modernization
the expansion,
capital
flight
exposed with existing
requiring the application
government
in
order
to
provide
137
secretive nature of
investors
and requests
the return of
it requires for
lives
in
order
the
to apply for
it
that have spent their
goes
in fact
any investor
inherently
the
It would be
security abroad.
to create their own financial
Latin
for
roadblock
the black market,
in
from
assets
return
misunderstood
covertly purchasing dollars
surprising if
to
inordinate
MIGA has
Here
investor.
an
cause
will
abroad,
plan
nationals who
to
coverage
to his government
political
risk
has
million he
$10
insurance
stashed
away through the years.
On the
coming
opens one major door
One that
flown capital.
of
the
privacy
Latin investor
can
use
of
for certain
that
referring to
assets
the fact
in the United
any
States
a
Florida
That new entity would qualify under
the terms
those
corporation.
also allows
liquid
holding
previously
for the return of
intervention
I am
information;
of
developing one can be
does not require the
government and
host
investment
fact any new
into a
a member country
from
insured,
the
hand,
other
funds
this agreement to
to
seek
capitalize,
say
insurance coverage, as
it
would
138
be
American
as an
treated
in
investing
corporation
a
developing nation.
Covered Risks
-
and
Transfer
convertibility restrictions
restrictions on the repatriations of
denial
the
by
host
government
agreed by
days as
application
exchange
convert
for such
rate
local
transfer of
through
and passive blockage,
than 90
the contract)
transfer.
discrimination,
local
decrees,
laws,
bureaucratic delays
conversion for more
implies the
which
the conversion and/or
administrative or
transfer and/or
many
of
This
currency).
usable
or administrative acts;
regulations,
where
freely
(such
dividends and other
both active blockage,
coverage embraces
funds
in
proceeds
investment
explicit
of non-
types
broadly defined
MIGA
risk, namely:
commercial
as
three
of
coverage
offers
agencies,
investment guarantee
most
Like
of
Coverage
i.e.,
the
currency except at an exchange
hold up
days
the
also
(or
as
investor's
includes
inability
less
the
to
favorable
139
than
rate
reference
a
of
the
in
specified
exchange
guarantee contract.
-
coverage
expropriation.
direct,
administrative action
The pertinent
of
guarantee
his
Conditions
of
his
Guarantee
which
"creeping expropriation,"
measures which when
each
a
considered
extend
a
coverage
to
series of host
implies, a
combined are expropiatory,
taken alone might
individual measure
proper
or
MIGA's General
investment."
explicitly
holder of
of,
control
or
ownership
benefit from,
even though
or
or omission attributable to the host
substantial
government
the
of
action
government which has the effect of depriving the
a
indirect
language
legislative
"any
includes
Convention
This
measures.
similar
designed to broadly encompass
is
and creeping
MIGA
and
Expropriation
the
exercise of
host
be
government's
regulatory powers.
-
coverage
disturbance.
War/revolution/civil
usually
embraces
the
removal,
physical damage of tangible assets of
and
the
substantial
interference
destruction
This
or
an investment project
in
the
enterprise's
140
a result of acts of war,
business operations as
violence designed
or other organized political
in
contract
with the
involvement
MIGA's
coverage
is
the guarantee
where
from the
due
holder
process and
which
to
is empowered
or
the
is
complaint to a
is
independent
The second is
make binding decisions on
where such decision
insurance contract
third
case,
(to be not
where
the
is not
time as
is specified
less than
two years);
rendered within a reasonable period of
the
its
first
executive branch, adheres to minimum standards of
the complaint.
in
cases, The
cannot take
tribunal
avoid
investment disputes,
three types of
or arbitral
competent court
In order to
party.
any
government
the host
in the substance of
confined to
contract
from
resulting
entity of
insured
of
breach
losses
encompasses
offered
conventionally
special
offer
repudiation or breach by an
of a
operations
enterprise's
these
to
also
It
protection.
major
to
least one year.
addition
MIGA
coverage,
projects
the
persisting for at
In
practice,
confined
normally
is
interruption
interferences
to overthrow
In accordance with common
the host government.
business
revolution
guarantee
holder
cannot
141
enforce
an
due
days
90
from
as
such other period
Any
guarantee contract.
justice
of
may entitle
to compensation, so that the guarantee
in
final
a
obtain
such
of
enforceability
and the
course
to
recourse
both adequate
covers
decision in
denial
of
three cases
guarantee holders
fact
individual
in the
may be specified
these
within
favor
his
enforcement action or
initiation of
of
in
award
decision.
importance
particular
profit-sharing
transfer"
contract coverage
of
The breach
to
investors under
or
agreements
The
contracts.
latter
in
"build,
are
in
tends
to be
of
production- and
operate
essence
variants
and
of
turnkey contracts where a construction syndicate delivers a
plant
(e.g.,
operates
retains ownership or
it for a specified period of
transfers ownership
In
plant),
a power
this
investment
to an agency
example, the
from the sale
of
time, after
the host
construction syndicate
of electricity under a
rate formula according to a sales contract,
state-owned utility company.
it and
which it
government.
recoups
its
specified
usually with a
Depending on the specifics of
142
the
cover
may
MIGA
arrangement,
the
construction
the sales contract.
syndicate's rights under
Premiums and Fees
self-sustaining
MIGA is required to operate on a
losses.
reasonably projected underwriting
standby
fees,
application
special
for
fees
for
It charges
small
for
committed
but
actual
coverage,
and
premiums
premiums
inactivated coverage,
and
expenditures
administrative
its
cover
adequately
which
premiums and fees
must therefore charge
It
basis.
in conjunction with
services rendered
a
guarantee.
most
Unlike
offers
MIGA
insurers,
individually priced
and coverage
covered
in
risks.
light
type of
etc.)
of actual
varies
investors
a
choice
between
of
all
packages comprising
risks
types
of
it is now devised, and subject to review
As
coverage
private
coverage of particular types
risk
of
and
agencies
national
experience, the premium
(e.g.,
currency
between 0.3 and
rates
for any
transfer, expropriation,
1.5 percent
of the amount of
143
this range, MIGA
guarantee per annum.
Within
determines the actual
premium
of
results
portfolio
rate in accordance with
it
risk assessment;
the impact
account
risk
its
each case
in
the
take into
may also
of the proposed guarantee on its overall
rates
premium
the
and
of
a
potential
coinsurer and reinsurer.
Variable
underwriting
flexible
its
determines
of
other
relevant
consistency
such
of
each
rating,
(a
to a
before,
MIGA
noted
for appraisals and
review
the
objectivity and
source of
recommendations, and final
To determine
the
management
decision by
rates
sets
risk
comprising
the package
that provide
underwriting
of
staff
the President.
range for
and may
in
MIGA's
MIGA
risk packages,
for
a rate within the above
first
conflict
organization)
heterogenous
senior
and
guarantee proposal
recommendations by MIGA's
by
the
broad ranges on
To ensure
factors.
premium
of
corollary
institutes administrative procedures
president
staff,
profile
politically
a
As
concept.
premium rates between
the risk
basis
are the
premium rates
each type of
then apply,
at
its
144
the
assessment,
developmental
each
particulars of
underwriting").
than those of
approach
countries,
such
as
of
investment
conditions
they
may affect
that
investment to
sought.
in
normally
individual
the
reflect
project
it may make
or
import
indebted countries.
also
the host
into
takes
country to
of
account
the extent
a particular
the specific risks against which coverage
a bilateral
as
evidence
is
investment protection
the investor's country and
accepted
it
economically
in
export-oriented
the vulnerability
The existence of
treaty between
is
course,
to
designed
is
good projects
substitution projects in highly
MIGA,
(so called "project
country, and
the host
MIGA to cover
possible for
troubled
project
risk characteristics of
fairly the
rather
individual
This
a
the
on
attention
primary
its
focuses
as
this unique approach.
agency prompts
MIGA
risk
entity
the
of
nature
inherent
determined
country
host
the
and
project's
the
by
solely
the
the sum of
of
should be
rates
Although
rates.
individual
to 50 percent
up
option, a discount of
of
the host country
adequate
legal
145
and reserves.
foreign exchange regime
Future Expansion of
for
its
guarantee program
of
the Board
extended
and
loans to
By
to additional
terrorism or
before assuming coverage
that
direct
be
long-
investment and
a project enterprise
the
could
made by a
might
same token, coverage
risk
such
investment which does
not
types of
non-commercial
within the ambit of MIGA's existing program
outlined here are
remember
cover
sabotage.
precisely fall
is
the initial
incorporation,
For example,
Companies planning an
as
set by the
further developed and expanded by
forms of
institution.
be extended
as
can be
Directors.
medium-term
financial
articles of
to additional
Insurance Program
the
MIGA's broad parameters
According to
Convention
is the host country's
Another important factor
protection.
MIGA is an
not a for-profit
insurance
encouraged
to
MIGA
consult with
is not available.
It
is
key to
investment incentive agency
corporation, and as such
and
will,
146
when and where
appropriate, decide to extend or modify its
investment or risk.
programs to cover an exceptional
With this we have analyzed potential
political
insurance, and covered
risk
that
the
multilateral
to date this
its programs make
if
such coverage,
incentive
to
bring
understanding
of
the Latin
of
answer
rationale and
the
a strategy
grossly misunderstood
chapter
attempts
subject
drawing
of
repatriate their
to
question
this
particular
country
mainly
some
from
on
personal
interviews with Latin American individuals
of
corporate CEO or
investment assets
heads of
that the
risk diversification
light
is
The next
this particular
experience
and
in the positions
families holding
in the United States.
in
investors
by American policy makers.
to shed
lies
idiosyncrasies
observed by Latin
decision process and criteria
following
be enough
is my contention
It
entrepreneur.
it too soon to
will
as proposed
investors
Latin
to
key
due to
has not sold any coverage
entity
establish
The
The fact
Bank.
The World
agency:
recent announcement of
assets.
in depth one program
candidate, a branch of the wealthy and
offered by a natural
powerful
suppliers of
substantial
147
Chapter 4
Latin American
Investment Abroad
American investment
Regarding Latin
key
abroad,
the
are
the
chapter attempts to understand
issues that this
following:
-
in
Which
are
their own countries,
-
it revised.
has been
the actual
abroad, specially
investors perceive to face
compared to ones
as
investment
How was the
often was
risks
the
faced abroad.
strategy devised and how
And as corollary to this
issue, what
(returns) with
investment
experience
as compared
to the returns
the investors
were accustomed to at home.
-
purchase
Would
political
these
risk
investors
insurance if
be
in
the
market
it was available?
to
148
capital
Once
If not, why not?
back?
part
As
interviews were
In order
to
subjects
some cases
doing so
to
access
to
to
the
insure
information,
confidentiality
are only identified
by
of
commitment,
Respecting that
provided.
of
anonymity
the
the
the subjects.
of
delicate
maintain
one of
but
all
the process,
recorded with the approval
improve
and
information
subjects
of
committed
personally
flight
bring
investors
would
insured,
I
my
the
all
country of origin, and in
industry, as not
I have chosen to disguise their
Most of
would have compromised this effort.
the
data from the interviews served also as supporting material
for
the previous chapters.
Rationale
During
Salvador
I was
the
informed of
insurance program in El
auspices
of
meetings
investors
the existence
Salvador
the U.S. Agency
with
for
The program provides protection
that was
of
from
El
a specific
created under the
International
Development.
to the investments of
the
149
private
sector
in
Salvadoran economy through
civil
turmoil,
nvestment
being
purchase
because when
sale of
say
by
collatera
I
the program was
proposed,
product a "hard"
this
the
levels
Irrelevant of
difficult
reinsurance.
large enough market
a
pertains to
expense
if f icu l t
its
sought Lloyds of
insurance companies and eventually
skeptical
as
had
System
it used as a marketing arm a consortium of
U.S. AID;
to
Insurance
acronym),
a fund provided
beginnings based on
the
of
terrorism.
Promotion
spanish
its
sectors
insurance against damages due to
malicious acts and
The
(PROINVER
strategic
certain
fact
the
London
beginnings
insurers were
local
This hard sell
protection costs
for regular
maintained
local
existed and considered the
sell.
insurance
the
hazard
protection provided, this
issue
doubled
policies.
is a huge
cost
hike for entities operating marginally in a region affected
by
internal
warfare.
Studying
the
Salvador
is relevant
existing
program
results
for
of
this
this thesis,
providing
as
comprehensive
program
it
in
El
is the only
insurance
for
150
risk of
managing the
destruction of
stoppages and
loss
from the
drawn
type of
be
Salvador, and
an
El
for this
demand that exist
the
incentive enough for
is
funds out of
year of
The
experience.
moderate
FOINVER
and
included, the
loss
the program
of capital
and continues to be quite
the
terrorist attacks
pursuing.
Nonetheless,
not
been
suffered
a
income
is
interest
while the
impact
productive sector
the
industries to rebuild has been,
important.
productive
has
has
minimal,
on the psychology of
have
losses
year
fund)
is
one
barely completed
fact, when
In
and the ability of damaged
providing
investors to stop drawing
has
first
(AID's
outflow.
significant
the
if
the country.
PROINVER program
The
of
Conclusions may
protection, and most importantly, establish
insurance
their
assets.
experience in
made of
estimation can be
work
and guerrilla caused
terrorist
proven
sectors
to be
The policy
goals of
against
protection
valuable
the ultimate goal
and
worth
being studied by
Gudger, William Michael ( November 30, 1988) Report to
of USAID - El Salvador, for
the Private Enterprise Bureau
the Investment Promotion Insurance Program.
''
151
work,
this
been
flight has not
stemming capital
that of
achieved.
indicated by
As
factor
and a
in the decisio n
commercial
acts,
level
needs
terrorist
the expectation,
is
must assume the economy it
to be subjected
is not going
advantage
overnight.
commerc ial
risks,
of
protect an
to
n ationalizations,
investor
cau se
investment
risk.
events,
These
in
If
the
investor
the
demand
economy
can
higher
the higher
adjust for
order to
labeled
loosely
to
to huge
comparative
his
change
may
that
swings
macro-economic
levels
not enough
economical
of c ertainty, that his business plans can
in
is participating
both in an
1ity,
is
It
overriding
the
investors,
The ent repreneur
achieved.
returns on
stabi
risk S of
the
What
etc.
with a high
be
sens e.
from the
enterprise
is
local
not
sustain
realistically
those higher
of
expected profits,
investor will
simply move some asse ts
to safer grounds.
This
there
must
demand for
was no
PROINVER.
point
In
fact,
the
levels
not
be misunderstood
the political
program
risk
quickly
the
to imply
insurance of
oversold
its
152
underwriting
capacity, even though,
limited to
been
policy,
and
the
export oriented
program
50% of
value covered
the
government
made it
Consorcio,
Colones
deductible and
giving
the
Salvadoran
very
rationing will
exposed
mainly to
sub
a total
is
likely
could be
to attack
quite high
the private
capacity
This
that
that
local
of
the context
produce anti-selection;
insured
by the
million).
in
be
leveraged only
10% retained
amount
It
industries will
losses
fund can be
U.S.$24
small
economy.
the
program
(approximately
undoubtedly a
begin
available
the fire
insuring the Salvadoran bus fleet).
the 15%
case,
under
(The exception was a small
industries.
At present, PROINVER's
by
insurance coverage has
of
such
is,
144
is
the
severe
the
most
first.
This
if
terrorist again
the
industrial
being the
structure
of
the
country.
Thus,
certainly, it
there is a market and there
is too soon to measure the
investment this
program will
have
in El
guess
if
will
only
is that,
any,
it
is a need.
impact
on capital
Salvador.
slow
And
But my
the rate
of
153
f light.
capital
The
to
political
in
deplaning
day
"the
succinctl y by saying
[due
Miami
to
know
want
don't
have to
0Ur
money
will
As he put
Panama.
reached a critical
irrelevant
will
example,
liquid
continue to
is
"insurance"
until
his
own
Such
an
individual
could
investors
t heir
investment
the
Panamanian
a
asses abroad
nest egg
to
purchase
pull
moneys
not
insurance
out
of Panama
the
afford
This
of
a bank
formed at
yet
sustain
leave the count ry.
liability of not being able to collect on
to some small
with an
his family ha d not
it,
the
of
among
in
when
the bank."
in
to differ
they had to
famil y in case
protection
of
mass
that
started creating
just recently
had
my country
deal
go and
be safe
found
For
process.
diversification
investor,
leave
they reached another stage
mainly when
the
I
expressed this view
have to
we
This position was
outside of
I
u n rest],
insurance company.
investor
investor
peruvian
account.
contingent
his insurance due
print technicality.
Note that until
the recent events
Noriega administration, Panamanian
surrounding the
investors
generally
not
154
participated
premises
flight.
in capital
capital
that
Panama uses the
and
U.S. dollar a
the most common political
America,
The U.S.
in the
the absence
of
the rest
of
investors a
coupled with
factors,
the
and
the
taxation
low
contributed to make Panama an exception in
have
the region.
presence
foreign
and
community
the financial
strength of
structure,
these
currency,
the only printed
local
Since
controls.
problems suffered by
given
All
security.
sense of
that
has
in countries
historically insured
Zone, which has
Latin
mainly
transfer
such controls are not practical.
Canal
confirms the
occur
outflows
severe exchange
imposing
This fact
Capital
risks
political
threat
a real
become
have
from until
"flee"
had nothing to
now
to the
community.
On
Salvador
had
the
other
started this
process
had accomplished substantial
in the
United
different stage of
the
financial
investors
had
game, participating in
stocks and bonds and other non passive forms
In their
words, the most
successful
process
El
ago, and
over 25 years
success and
These
States.
from
investors
both
hand,
security
entered
a
land banking,
of
investment.
followed
had
155
been,
first
to
"acclimatized"
start joint
records
and
"park"
funds
with the
local
in their fields.
the significance of
the foreign
owned
prevailing
result was
U.S.
lower
operations.
these
became
track
process developed
portfolio
increased,
get involved with
started by going
those
into
When doing
home.
at
that returns
than
Second,
ventures.
the process
businesses the
were
this
family members abroad to
For most,
they
people having good
Then, as
the direct management of
same
while
investment environment.
ventures with
they moved key
abroad
on
so,
in
the
in the
investment
obtained
the
their
In
this regard,
comparing
on an
industry basis,
the case for
investment
insurance could be
made very well.
The
premium costs,
return differential
the investor would
home and political
risk
exposure
industry
home
would
secure higher
to
justify the
returns at
would be protected by the
policy.
But,
sophisticated
this
was
not
and experienced
investment in their
the
case
investors as
foreign operations was
for
the
most
their return on
greater
than the
156
their
in
achieved
one
the specific group operated a manufacturing
if
For example,
at
investment
the average return on
home
ventures
through joint
of
the return
market
U.S.
potential,
would
impossible to match
local
of
limited
competition,
constrained.
their
own
financing
small
Local
development
in developing economies.
in one
concern over the saturation of
their
markets in a par ticular
limitation
The
fact, most investors stated
As a matter of
way or another, their
ever entice
The sheer size of
it.
unlimited
provide
estate
Latin America.
to
justify
would not
opportunity cost
the
insurance will
investment
capital
obtained
once that
can imagine,
As one
is reached, no amount of
stage
being
lower
Returns
the U.S..
land speculation and real
in
U.S.
in the
development
in
what was
than
higher
were not
provided were much
it
the returns
operation at home,
than
all.
industry basis, but over
to
comparing on an industry
is not
this
Note
host countries.
industry.
developing
countries,
creation of
wealth and
locally.
When
this
is
a natural
so
even with
perspectives
investment
projects are
This
expected
the
survive on
to
ability to
fails,
in
are
a
secure
somewhat
157
main cause being the
diversify their country
how in a particular
in
in
participating
was their need
for secrecy and
Even recognizing
the
areas where
of
that real
information
to
interviewed
insurance
if one
with
World
insurance program will
MIGA
abroad.
in
lost
expertise, the risk
from sharing
them
This
that
is
requirement
opportunities are being
the government.
Bank's
investors
to their holdings
investors had personal
before.
Categorically they
privacy.
repercussions would stop
future
indicate
to all
government be privy
that their
cases, also
ventures as described
joint
would not seek to purchase
In most
nations.
common factor
One
invested
industry and region, many have
local
know-
and take advantage of
risk,
developing
neighboring
In an effort to
investors.
effected by these sophisticated
also been
has
of capital
repatriation
Crossed
system.
local
liquidity in the
lack of
The
been repatriated.
has
capital
contradictory manner,
a
be required to make
any
attitude should
change
in
its
it successful.
158
abduction.
Investors feel th ey
exposure in
areas not
income
abroad.
in
own
by exposing their
private
It
must be
government.
none of
co un tries
their
increase their
would
an
these investors paid
income
for
generated
(They did pay incon e tax, where applicable,
in the
were kept).
This
where these
situation creates
be
assessed
paid on the
i n vestments
a delicat e
legislation, the same
be
to t he ir
that without exceptio n
host countries
should
insur ed ,
information
taxes
increases the risk of
the policy si mply
the existence of
noted
happens
it
insurance pr ov ided by Lloyds, making public
with kidnapping
financial
same way as
In the
policy be totally secret.
the
of
existence
the
require d that
Investors
legal
retroactive
as
issue,
taxes
in the U.S.,
individual's world
as an
because
requires
income.
investor
that
local
taxes
159
Chapter 6
Conclusion
risk
Political
the serious
mainly
of
the main sources
not change
commercial
risks
macro economic swings suffered by the
lack
of
forms
direct
of
or
profitability for
the
its
potential
every type
of
the major
economies.
The
coupled with many
investment
to
would contribute
the volume of
in
intended
buyers,
risk
caused by
local
intervention,
and
hurt
the
this
results
alleviate
some of
investment back, and
these concerns, bringing some capital
achieve
capital
the entrepreneur.
Insurance
cause a decrease
the
These are
government
indirect
security of
the
threaten
not
concern.
which,
infrastructures
adequate
is
such,
eliminate that one
Acquiring protection to
flight.
as
investor's concerns causing
solution to alleviate
does
insurance
the outflows.
and be
attractive
But to be
to
all
insurance must be made available to
industry and with no
strings attached.
The
160
carrier must commit
to
long term coverage, and not require
the special
previous approval
government
itself
and
insured
treatment of all
the
solution
is
is
truly
welcomes
Paying
lip service
balances
achieve this
an
The
are
entities
unbiased
equal
and
it can
honesty of
adopt
places the
attracting capital
the
population.
to attract it,
allows
to this principle
the system
to
create the wealth to
If
the only
countries create an environment
know that
something fails,
of
reversed
investment,
government and the
and
investment will
to be
that the
investor must
which
forcing
living conditions
flight
capital
not,
know
government.
players.
Only capital
improve
the host
not
should
which are
of
trust
it
to
flourish.
is not enough.
The
the stability of
the
its bureaucrats.
will
the needed
LDCs at
have
that
That when
the adequate
solutions.
a major
checks
Failure to
disadvantage
in
vis a vis the developed nations.
Insurance should be considered only as protection
for uncontrollable
hazard
fortuitus
events.
Just
as
regular
insurance protects a family from catastrophic events
161
but is never a substitute for
way, selling
roots of
protection
the problem.
MIGA must be developed
advise
to the
proper
policies
capital.
a safety program, in the same
should
Programs
like
attract and
the
attacking the
the one presented by
in conjunction with
governments of
to
not replace
LDCs to
the
consistent
implement the
retain foreign
and
local
162
Appendix 1
List of
1.-
Interviewed Subjects
Richard Stern
Vice President & General Counsel
Citicorp International Trade Indemnity,
New Jersey
2.-
Victor Meneses
Senior Corporate Officer
Latin America and Africa
Citibank. N.A.
New York
3.-
Gonzalo de las Heras
Senior Vice President
Morgan Guaranty Trust Company
New York
4.-
Byron M. Shoulton
Economist
Foreign credit Insurance Association
New York
5.-
John H.B. Harriman
Senior Vice President
First Interstate Trading
Miami
6.-
Harry Hood Bassett, Jr.
President and Chief Executive Officer
Bank Espirito Santo
Miami
7.-
Walter Bastian
Director Caribbean Basin Division
U.S. Department of Commerce
Washington, D.C.
Inc.
163
8.-
James Todd
Economic Advisor
U.S. Mission
Organization of American States
U.S. Department of State
Washington, D.C.
9.-
James C. Suma
U.S. Agency for International
U.S. Department of State
Washington, D.C.
10.-
Charles A. Leik
Deputy Vice President
Export-Import Bank of
Washington, D.C.
Development
the United States
11.-
Jose Alberto Oribe
Counselor
Embassy of Guatemala
Washington, D.C.
12.-
Rodolfo Rohrmosser
Ambassador
Embassy of Guatemala
Washington, D.C.
13.-
Donna M. DiPaolo
Office of Regional Economic Policy
for Latin America
U.S. Department of State
Washington, D.C.
14.-
Faustino A. Perera
International Economics Division
Office of Trade and Investment Analysis
U.S. Department of Commerce
Washington, D.C.
164
15.-
John W. Gurr
Senior Insurance Officer, Latin America
Overseas Private Investment Corporation
Washington, D.C.
16.-
Luisa D. Cerar
Director
Commonwealth of Puerto Rico
Economic Development Administration
Washington, D.C.
17.-
Felix Pena
Sub Gerente de Integracion
Departamento de Desarrollo Economico y
Inter-American Development Bank
Washington, D.C.
18.-
Mark Le G. All
Division Chief
International Capital Markets
International Monetary Fund
Washington, D.
19.-
Kyung-Mo Huh
Senior Economist
Exchange and Trade Relations Department
International Monetary Fund
Washington, D.C.
20.-
Gunther H. Muller
Gerente General
Corporacion Interamericana de
Washington, D.C.
21.-
Social
Inversiones
Christophe S. Bellinger
Guarantee Officer
Multilateral Investment Guarantee Agency
The World Bank
Washington, D.C.
165
22.-
Miguel Urrutia
Interamerican Development Bank
Washington. D.C.
23.-
Roger Lacayo
Nicaraguan Entrepreneur
Refugee in Miami
24.-
Sergio Garcia-Granados
Senior Vice President & Financial Consultant
Shearson Lehman Hutton
New York
25.-
Carlos Escobar
Vice President & Financial
Merry l 1 Lynch
Miami
Consultant
26.-
Investor
Peru
30.-
Investor
Honduras
27.-
Investor
Ecuador
31.-
Investor
Chile
28.-
Investor 1
El Salvador
32.-
Investor
Panama
29.-
Investor 2
El Salvador
33.-
Investor
Guatemala
166
Appendix 2
Questionnaires Used
A verbal
an
risk
explanation was
interview, regarding the concept of
insurance to
text accompanied
INVESTMENT
Latin American
capital
it,
in
their own
the
following
IN LATIN AMERICA
INSURANCE FOR POLITICAL RISKS
nations
investment.
is due
growth
in
Capital
faced with the perspective of
chronic
investors
their questionnaire:
The absence of
American
providing political
requested
the ones that
countries. For
as
given to each subject of
currency
in
out of
the
lack of
the region when
confronting unbearable risks
devaluations,
exchange controls, and general
to
great part
flies
Latin
the economies of
political
nationalizations,
instability.
167
long
term commitments and adequate financial
drawing
impact of
America would
growth
increased
basis for widespread prosperity
and
feasibility
insurance to any
given
in the
long
providing
economies
of
providing
such
emphasis
will
interested
party.
Special
analysis
to the
Caribbean
an extension to the Caribbean Basin
programs
coverage
U.S.
has
many
its
and Central
in Latin America.
The
could be
Initiative.
foreign
restrictions
the
is to establish
term benefits
through
the
in the region.
American countries. as a program such as this one
OPIC's
income,
foreign currency
and
this thesis
of
The purpose
The
Latin
into
capita
per
exports
eventually stable
and
reserves,
about
increased
GNP,
of
investment
massive sustained
bring
backing, Latin
the region.
back to
lured
be
abroad could
savings
be
by a carrier with
insured
these risks could be
If
to
investment
provide
insurance
insurance
fact only U.S. citizens
(or
corporations owned by U.S. nationals) are eligible for
coverage, coupled
investor's
lack
of
knowledge of
these
168
their
programs and
lack of
If such insurance
interested
probably
"nest egg"
party willing
has kept them away
savings outside
include
of
program was
direct
interviews
any
it would
with
Latin Americans
countries.
their own
information
to
available
its coverage,
to pay for
attention of
receive the
Sources
fol
home"
region.
from the
wou
"know
for
this
with
research project
officers
of
the
wing entities:
-
Foreign Commerce
Insurance Association
-
Overseas Private
Investment Corporation
-
U.S. Agency for
-
International
-
Private
-
Caribbean Basin
-
Ministers of Economy and Finance of Latin Countries
-
Private Export Funding Corporation
-
Eximbank
-
Individual
International Development
Monetary Fund
Bankers
Latin
in
Florida
Initiative's office
investors with deposits abroad
169
Following, please find samples of
for U.S. Bankers:
Questions
1.)
risk
the questionnaires:
think
Do you
insurance to
to offer
it would be feasible
latin american
their
in
investors
pol itical
own
countries?
2.)
Do
effects
such
you think
the size
on
of
coverage
would
latin american
have
any adverse
deposits
in the
U.S.A.?
loose any business because of
a.)
Would you
b.)
Would offering this
adverse effects on
3.)
have
Would increased capital
any effect
forei gn debt?
it?
insurance coverage have any
the U.S.
economy as a whole?
investment
in those countries'
in
latin
ability to pay
america
their
170
a.)
If so, would you support such a scheme
proposed
if
by the U.S. Government?
b.)
claims, the
In case of
insuring entity would have
the
recourse with the government of
ultimate
question.
country in
What type of
institution do
you think, would have a comparative advantage
host
to effect such a claim to the
(leverage)
government?
4.)
viable,
In order to make insurance
require
senior
imply banks
claims on the country's assets.
This would
become subordinated
creditors.
have to
would
Would U.S. Banks accept to subordinate
5.)
Given
bank's
involvement with
companies, would
risk
insurance?
insurer might
the
asymmetry
the region),
they
be
Can you
in
their debt?
power
(and
as compared
interested
their
with
in providing
legally do so?
deep
insurance
country
171
1.)
Insurance Company Executives
for
Questions
such insurance desirable?
Would you consider
Describe
2.)
bankers,
potential
any
such
as much
in
American deposits now in
If political
3.)
deposits
American
investments) back to
a.)
4.)
the U.S.?
enough
itself be
by
factor
from
for
repatriate Latin
scheme would
were offered, would that
insurance
risk
interest
of
conflicts
U.S.
Banks
shift
of
a
to cause
(or
$
Latin
denominated
their home countries?
Can you estimate demand?
Do you
think
feasible for private
such insurance
enterprise?
would be
If not,
who
economically
do
you think
could provide coverage?
5.)
As
country
an
insurance company, are you willing to accept any
risk?
172
6.)
case of
In
question.
type
What
comparative advantage
insurance carr ier
would have
of the
country in
the government
recourse with
ultimate
the
claims,
of
would
institution
( leverage) to effect
have
a
such a claim to
the host government?
7.)
Would you
against
(as
an insurer and/or a
such coverage be offered by:
a.)
Private entities
b.)
The U.S.
Government
u.S. Taxpayer) be
173
for Latin American Investors:
Questions
Latin
involved.
This questionnaire
There has been very
and
little research performed
the contention of
is
it
seeks to understand the
individuals.
faced by these
and decision process
rationale
their
economic
and
high political
due to the
businesses demand
risks
as
in their home countries as much
are not investing
groups
able
American entrepreneurial
the writer,
that
in this area,
the process
is
grossly misunderstood abroad.
Political
major area
of
risk
insurance, by alleviating
one
been considered
as
investor's concern,
has
the sol utions to attract capital flows back
one of
region.
This
reactions
as
questionnaire
an
investor
also seeks
in
the
into the
to understand
region,
your
these
to
statements.
0.)
Describe the
country of
origin?
the risks
nature of
(Please
you face
in your
define risks separating
sovereign risks from commercial
ones.)
pure
174
a.)
Could
you identify unusual
risks
that
political
or economical
are unique to your investment
environment?
1.)
interested
Would you be
in
Can you
such coverage?
imagi ne or estimate demand?
a.)
If
such insurance was
investment
additional
b.)
Would
(I.E.,
From short rang e to
Who would
intensive
take
(Foreigners or
2.)
How
% of
the
to
labor
advantage of
locals,
to the region?
investments?
from
intensive).
this type of
coverage?
and why?)
pay for coverage?
insured portfolio,
would a reasonable rate be?
it bring
long range,
be willing to
much would you
Expressed as a
(new capital)
it change the ty pe of your
capital
c.)
offered, would
for
you, what
175
a.)
Since
investments,
specially
industries, have medium or
periods,
to returning any
3.)
intensive
long term pay-back
what commitments would
regarding the duration of
b.)
in capital
your
you require
coverage,
in order
investment capital?
What deductible would you consider acceptable?
What entity would you expect be willing to give such a
coverage?
What
level
of
skepticism would you have to these
parties honoring such coverage agreements
a.)
International
b.)
Foreign banks
c.)
U.S.
d.)
Multilateral
Govt. Or
insurance companies
similar
entity
international
organizations such as World Bank,
Interamerican Development Bank, etc.
4.)
Given the availability of
you be willing to shift back
Denominated assets,
this type of
coverage, would
any of your deposits or U.S.$
to your home country?
Why?
176
a.)
Is there any difference between the return on
investment
investment you are obtaining, from your
in your
portfolio abroad with the one
b.)
each of
is the return on equity on
country?
What
the major
types of
What percent of
investments you own?
your assets are held abroad?
identify how
Do
(The purpose here
you have a specific target?
to
home
over-exposed are
local
is
investors
to country risks.)
c.)
Is there a fixed
moved out of
percentage of
kept out regardless?
is there a certain amount
How do you set these
Please explain the rationale for
family's
strategy?
that are
the country every year to diversify
investment portfolio, or
d.)
profits
investment policy.
Who decides? How
investment instruments?
How
What
goals?
your group OR
is the
do you choose the
did you choose the
country where you maintain your assets?
177
e.)
The media views your investments
flight and
abroad as
capital
not as portfolio diversification, as
would be the case for an American investing
abroad.
5.)
Referring
What are your
to your
views on this matter?
country of
origin, please answer the
following:
a.)
Is there a problem of
Is there a need
b.)
What would be
lack of
capital
for additional
the effects of
investment in to your
investment?
investment?
channeling additional
country?
What amounts would
be needed to make a difference?
c.)
How do you expect your home country's government
to view this proposal?
support,
do you think
If
it
it counts with official
is possible to secure
guarantees to be offered to the entity providing
insurance to entice
service?
them to provide such a
178
d.)
insurance solution to the
Can you create an
of
investment in Latin America?
6.)
How often do you revise your investment
7.)
How sensitive
deci
strategy?
investment allocation
is your
criteria to
sion
lack
process or
local:
Political events
Economic conditions
Interest rate
8.)
In
you
have
(ie.
depressions,
differentials
t he future do you see any changes
made
decisions.
investment
attemptin g
to establish
experienc e
and
inflation)
if
results;
have
regarding the way
The
question
is
given
pr evious
investment
you
con sidered
different
strategie s for the future?
9.)
If
country,
your company went
would you
through a crisis
return any
portion or
denominated assets in order to resolve it?
in your home
all
of
your $
179
10.)
would
When borrowing abroad or
in
consider
you
pledging
guarantees,
in your country, have you or
the
future
domestic
or
offering
foreign
crossed
assets
as
collateral?
11.)
Do you think
talent due
to
latin america
lack of challenging
faces also a
local
flight of
opportunities?
180
Appendix
Sample
3
Insurance Policies
Policy Number:
Form
: EXPRO-TI (1/88)
EXPROPRIATION INSURANCE
between
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
("CITI")
and
(the "Insured")
DECLARATIONS
For purposes of this policy, the terms below are defined as follows:
1.
Policy
2.
Host
Period:
Country:
3.
Enterprise:
4.
Investment:
5.
6.
Policy Currency:
Insured Percentage:
7.
Premium:
8.
9.
Maximum Liability:
Endorsements:
By acceptance of this policy the Insured agrees that all statements
contained in the Application and the above Declarations and all written
statements submitted by the Insured or its agents are the Insured's
representations and agreements and that this policy, which includes any
endorsements, constitutes the entire agreement between the parties
concerning the subject matter and supersedes any prior agreement or
understanding.
Agreed and Accepted By CITI
Title
:
Date
:
Form: EXPRO-TI (1/88)
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
EXPROPRIATION INSURANCE
Peril Insured
in consideration of the Premium paid by the Insured and subject
to the terms and conditions set forth below, CITI hereby agrees
to compensate the Insured for the Insured Percentage of loss
occurring during the Policy Period resulting solely and directly
from Expropriation.
"Expropriation" means any act or series of
acts constituting expropriation, confiscation, nationalization or
requisition by the Host Government which for a period of nine
months substantially and directly:
1.
Deprivation of Rights of Investor
Deprives the investor of rights In all or a specific portion
of the insured Investment which rights are necessary to
substantially
realize
the
benefits
of
the
insured
Investment; or
2.
Taking of Enterprise Assets
Deprives the Enterprise of all or a portion of its assets;
or
3.
Cessation of Operations
Deprives the Enterprise of fundamental rights,
ultimately necessitating the cessation of operations.
thereby
"Host Governmenr means the central governmental authority of the
Host Country, or portion of the Host Country in which the
Enterprise
is
located,
exercising
effective
legislative,
executive and judicial control, whether dl jure or dS facto.
II. Exclusions
CITI shall not be liable for any loss caused by or arising from:
1.
War
Destruction or physical damage
directly or indirectly
occasioned by, happening through or in consequence of war,
invasion, acts of foreign enemies, hostilities (whether war
be declared or not), civil war, rebellion, revolution,
insurrection, military or usurped power.
2.
Commercial Failure or Insolvency
Enterprise's commercial
The Insured's or the
insolvency or default on any financial obligation.
3.
Malfeasance by Insured
Wrongful, dishonest or criminal acts or omissions by the
Insured or the Enterprise or agents of either.
failure,
4.
Non-Compliance with Host Country Laws
Failure of the Insured or the Enterprise to comply with all
legal requirements of the Host Country and any other
governing authority, Including failure to obtain necessary
licenses and permits.
5.
Nontransfer of Currency
Exchange control measures or delays In currency conversion
or transfer.
6.
Breach of Policy
Material breach of any representation, condition,
or covenant of the Insured contained In this policy.
warranty
Ill. Compensation
1.
Total Loss
In the case of total loss, the compensation payable shall be
the Insured Percentage times
(a)
(b)
the principal and accrued interest of any debt
Investment covered, plus
the net book value of the equity Investment
covered, translated into Policy Currency,
as of the date the expropriatory effect commences. The net
book value shall be computed In accordance with principles
of accounting generally accepted in the domicile country of
the Insured and used by the Insured. Adjustments shall be
made to account for the Enterprise as an independent entity,
and to reflect the standard of arm's-length dealing between
related parties and reductions in realizable values.
2.
Partial Loss
in the case of a partial loss, the compensation payable
shall be the Insured Percentage times the net book value of
(1) the portion of the Insured's Investment taken or (2) its
In no case
prg rata equity interest In the assets taken.
shall the compensation payable for any loss computed under
this section 2 exceed the compensation which would be
payable for a total loss under section 1 on the date the
expropriatory effect commences.
3.
Date of Loss Computation
Compensation shall be computed as of the date the
Where the Expropriation
expropriatory effect commences.
consists of a series of acts, the loss date is the date when
the cumulative effect of the acts constitutes Expropriation,
thereby commencing the Waiting Period. Compensation shall
be Increased, however, to take Into account reductions in
net book value directly caused by such expropriatory acts
occurring prior to the loss date, but not to exceed the
Maximum Liability.
B64
4.
Insolvency
If Enterprise liabilities exceed assets as of the date the
Expropriation occurs, compensation shall not exceed the
insured Percentage times the amount the Insured would have
been entitled to receive had the Enterprise been liquidated
at book value.
5.
Salvage
Compensation shall be reduced by the insured Percentage of
any other compensation, offset or salvage realized by the
insured outside the Host Country with respect to the
Expropriation. Any amounts of salvage realized by CITI with
respect to a compensated Expropriation shall be applied
first to reimburse CITI for its out-of-pocket expenses in
pursuing salvage and shall then be divided between the
parties according to the Insured Percentage ratio. However,
to the extent CITi's net recovery exceeds the amount CITI
paid plus its out-of-pocket expenses, the insured shall be
paid a portion of the excess determined by dividing the time
period between the date of the loss event and the date of
claim payment by the time period between the date of the
loss event and the date the excess is recovered.
6.
Maximum Liability
Under no circumstances shall CITI be liable in the aggregate
under this policy for more than the amount of Maximum
Liability set forth in the Declarations.
7.
De Minimis Claims
CITI shall not be liable for any Expropriation if the amount
of compensation payable would be less than United States
$20,000.
IV. Conditions
1.
Notice of Potential Claim
The Insured shall notify CITI promptly, and in no event in
more than 30 days, of any occurrence which could give rise
to a claim.
2.
Cooperation
The Insured shall take all reasonable steps to avoid or
minimize loss. The Insured shall cooperate fully and cause
any person or entity within its power to cooperate fully
with CITI in the investigation of any claim, the resolution
of any potential claim situation and the pursuit of any
claim salvage. Such cooperation shall include disclosure of
records and documents and the making available of
Prior to any claim payment, the Insured shall
witnesses.
pursue and cause the Enterprise to pursue all reasonable
of
means
informal
legal, administrative, judicial and
avoiding or remedying any Expropriation which would be
compensable under this policy. Neither the Insured nor the
I~)L3
Enterprise shall enter into any agreement concerning a loss
or potential loss without CITI's prior written consent.
3.
Burden of Proof
The Insured shall have the burden of proof In establishing
its right to any compensations under this policy. Any claim
for compensation shall be submitted within 6 months of the
expiration of the Waiting Period following the event of loss
and if withdrawn may not be resubmitted.
4.
Assignment and Subrogation
As a condition to any claim payment, the Insured shall
assign to CITI all of the Insured's right, title and
interest in the Investment and assets taken and all related
claims against third parties.
Should CITI so request, the
Insured shall retain legal title to any interests or claims
to which CITI is entitled.
CITI shall have no obligation to
pursue salvage with respect to any claim.
Any salvage
received by the Insured shall be considered held in trust
for CITI and transferred to CITI for apportionment in
accordance with Article l1l, section 5.
V. Warranties
The Insured warrants and agrees that:
1.
Accuracy of Representations
All written statements submitted to CITI to obtain this
policy are true and correct and no material information has
been withheld.
Should there be any material inaccuracy in
the Insured's representations, CITI may void this policy,
retain the premium paid and refuse to compensate the Insured
for loss occurring prior to the discovery of the material
misrepresentation.
2.
Preservation of
The Insured
preserve all
applicable to
assistance in
to CITI.
3.
Confidentiality
The Insured will not disclose the existence of this policy
to any third party without CITI's prior consent except in
confidence to the Insured's broker and banker.
4.
Self-Insured Retention
The Insured will remain at risk for any loss resulting from
the peril insured by this policy to the extent of at least
100 percent less the Insured Percentage times the net book
value of its equity and debt interest in the Enterprise.
Remedies
will preserve and cause the Enterprise to
legal, judicial and administrative remedies
any Expropriation and furnish reasonable
maintaining any rights or property transferred
VI. General Provisions
1.
Declarations
The Declarations and the Application are an integral part of
this policy. For purposes of this policy, the terms defined
in the Declarations shall have the meanings set forth
therein.
2.
Cancellation
This policy may not be cancelled by either party, except
that CITI may cancel for nonpayment of premium upon ten days
In such case, this policy
written notice to the Insured.
shall be void _2 initio and no claim shall be compensable,
whether arising before or after the due date of the Premium.
3.
Non-Assignment
The Insured shall not assign or transfer this policy or the
benefits or obligations thereof to any other party or
The Insured may,
person, except with CITI's prior consent.
with CITI's prior agreement, require any payments hereunder
to be made to a named loss payee, all the Insured's
obligations under this policy remaining unaffected.
4.
Other Insurance
The insurance provided under this policy shall be excess
over any other insurance or indemnity covering the same
event of loss.
5.
Notice and Modification
All notices under this policy shall
delivered to responsible officers of
addresses indicated in the Declarations.
modified only by written, mutual consent of
6.
Governing Law
This policy shall be governed by the laws of New York.
7.
Arbitration
Any controversy relating to this policy shall be settled by
arbitration in New York, New York according to the then
prevailing Commercial Arbitration Rules of the American
Insured
initiates
Unless the
Arbitration Association.
arbitration, CITI's liability with respect to any claim
matter shall expire one year after CITI notifies the Insured
concerning an application for
of CITI's determination
compensation. A decision by an arbitrator or arbitral panel
shall be final and binding, subject to the Maximum Liability
limit.
be in writing and
the parties at the
This policy may be
the parties.
Policy Number:
Form
CURRENCY NONTRANSFER
INSURANCE FOR INVESTORS
between
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
(CITI")
and
(the "Insured")
DECLARATIONS
For purposes of this policy, the terms below are defined as follows:
1.
Policy
Period:
2. Host Country:
3. Enterprise:
4. Investment:
5.
Policy
Currency:
6. Insured Percentage:
7.
Premium:
8. Maximum Liability:
9. Waiting Period:
10. Endorsements:
By acceptance of this policy the Insured agrees that all statements
contained In the Application and the above Declarations and all written
statements submitted by the Insured or its agents are the Insured's
representations and agreements and that this policy, which includes any
endorsements, constitutes the entire agreement between the parties
concerning the subject matter and supersedes any prior agreement or
understanding.
Agreed and Accepted By CITI
Title:
Date :
0--ek
C&
Form
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
CURRENCY NONTRANSFER
INSURANCE FOR INVESTORS
Peril Insured
In consideration of the Premium paid by the Insured and subject to the
terms and conditions set forth below, CITI hereby agrees to compensate
the insured for the Insured Percentage of any loss occurring during
the Policy Period resulting solely and directly from a condition of
Nontransfer remaining In effect continuously for the Waiting Period.
"Nontransfer" shall mean inability of the Enterprise and/or Insured,
after all reasonable efforts, to convert and transfer outside the Host
Country available funds through any normal currency exchange channel
to remit In Policy Currency a distribution of earnings from or
repatriation of the insured Investment.
The loss shall be deemed to occur and the Waiting Period commence with
the first attempt by the Enterprise and/or Insured to transfer the
funds in question.
II. Exclusions
CITI shall not be liable for any loss caused by or arising from:
1.
Pre-existing Restrictions
Pre-existing restrictions on transfer such that the Enterprise
and/or Insured would have been unable to transfer legally a
similar distribution in comparable circumstances as of the
commencement of the Policy Period or as of the date of any
subsequent extension or renewal.
2.
Internal Freezes
Restrictions on usage of the funds within the Host Country.
3.
Nonperformance by Insured
Material failure by the Insured and/or Enterprise to perform any
reasonable legal requirement necessary to convert and transfer
the funds or to make all reasonable efforts to effect transfer
through all direct and indirect legal means.
4.
Malfeasance by Insured
Wrongful, dishonest or criminal acts or omissions by the Insured
or its agents.
5.
Insolvency or Financial Default
insolvency, bankruptcy or financial default of any party except
the official exchange control authority of the Host Country.
SPECIMEN
I
1.
6.
Currency Fluctuation
Currency fluctuation or devaluation.
7.
Delays by Insured
Failure by the Insured to attempt the transfer, or take
reasonable steps to cause the Enterprise to effect the transfer,
of the funds from the Host Country within thirty days of the
earliest date that the funds were available for transfer.
8.
Breach of Policy
Material breach of any representation, condition,
covenant of the Insured contained in this policy.
9.
War
Declared or undeclared war (whether before or after the outbreak
of hostilities) between any of China, France, Great Britain, the
Union of Soviet Socialist Republics and the United States of
America or between the Host Country and the Insured's Country.
warranty
or
Ill. Compensation
1.
Basis of Compensation
Compensation shall be the Insured Percentage times the Policy
Currency equivalent of the currency of the Host Country sought to
be transferred as of the end of the Waiting Period.
The
equivalent value shall be determined by applying the net exchange
rate prevailing in the normal exchange market or channel through
which Policy Currency Is generally available for the type of
transaction involved.
2.
Other Compensation
With respect to any event of loss, compensation shall be reduced
by the Insured Percentage of the amount of any other compensation
or monetary benefit realized by the Insured by reason of the
event.
3.
Currency of Payment
All compensation shall be computed and paid In Policy Currency.
4.
Salvage
Any amounts of salvage realized by CITI with respect to a compensated claim shall be applied first to reimburse CITI for its outof-pocket expenses in pursuing salvage and shall then be divided
between the parties according to the Insured Percentage ratio.
However, to the extent CITI's net recovery exceeds the amount
CITI paid plus its out-of-pocket expenses, the Insured shall be
paid a portion of the excess determined by dividing the time
period between the date of the loss event and the date of claim
payment by the time period between the date of the loss event and
the date the excess Is recovered.
190
5.
Maximum Liability LImits
Under no circumstances shall CITI be liable in the aggregate
under this policy for more than the amount of Maximum Liability
set forth In the Declarations. In the event that CITI has issued
an expropriation policy covering the insured Investment, under no
circumstances shall CITI be liable In the aggregate under both
policies combined for an amount In excess of the higher of the
two Maximum Liabilities set forth In Declarations of the
policies.
IV. Conditions
1.
Notice of Potential Claim
The Insured shall notify CITI promptly, and in no event in more
than 30 days, of any occurrence which could give rise to a
claim.
Notwithstanding any other provision of this policy, if an
event of loss occurs, CITI may terminate the Waiting Period and
demand a claim filing and an assignment and subrogation, in
accordance with section 4 of this Article, within ten working
days as a pre-condition to any claim payment.
2.
Cooperation
The Insured shall take all reasonable steps to avoid or minimize
loss.
Should a claim or potential claim situation arise, such
steps shall include taking all reasonable steps to effect
transfer of the funds through any legal means. The insured shall
cooperate fully and cause any person or entity within Its power
to cooperate fully with CITI In the investigation of any claim,
the resolution of any potential claim situation and the pursuit
of any claim salvage. Such cooperation shall Include disclosure
of records and documents and the making available of witnesses.
Prior to any claim payment, the Insured will pursue all
reasonable legal, administrative, judicial and informal means of
avoiding or remedying any event of loss which would be
compensable under this policy. The Insured shall not enter into
any agreement concerning a loss or potential loss without CITI's
prior written consent.
3.
Burden of Proof
The Insured shall have the burden of proof in establishing Its
right to any compensation under this policy.
Any claim for
compensation shall be submitted within three months of the
expiration of the Waiting Period following the event of loss and
if withdrawn may not be resubmitted.
4.
Assignment and Subrogation
As a condition to any claim payment, the insured shall assign to
CITI all of the insured's right, title and Interest in the
currency which is the subject of the claim and all related claims
against third parties and, unless illegal, deliver the funds to
Should CITI so request, the Insured
CITI In the Host Country.
shall retain legal title to any interests or claims to which CITI
Any salvage received by the Insured shall be
Is entitled.
considered held in trust for CITI and transferred to CITI for
apportionment in accordance with Article IlIl, section 4.
V. Warranties
The Insured warrants and agrees that:
1.
Accuracy of Representations
All written statements submitted to CITI to obtain this policy
are true and correct and no material Information has been
Should there be any material inaccuracy in the
withheld.
Insured's representations, CITI may void this policy, retain the
premium paid and refuse to compensate the Insured for loss
material
the
of
discovery
the
prior
to
occurring
misrepresentation.
2.
Current Exchange Control Regime
As of the commencement of the Policy Period and as of the date of
any subsequent extension or renewal, the Insured Is not aware of
and has no reason to be aware of any significant delays in the
types of currency transfers which are the subject of this policy
or any restriction imposed under the laws, regulations, orders or
decrees of the Host Country or under any voluntary agreement
which would impair or significantly delay such transfers except
as specifically disclosed in the Application.
3.
Preservation of Remedies
The Insured will preserve all legal, Judicial and administrative
remedies applicable to any claim and furnish reasonable
assistance in maintaining any rights or property transferred to
CITI.
4.
Confidentiality
The Insured will not disclose the existence of this policy to any
third party without CITI's prior consent except in confidence to
the Insured's broker and banker.
5.
Self-Insured Retention
The insured will remain at risk for any loss resulting from the
perils covered to the extent not insured by this policy.
VI. General Provisions
1.
Declarations
The Declarations and the Application are an integral part of this
For purposes of this policy, the terms defined in the
policy.
Declarations shall have the meanings set forth therein.
1c Z
2.
Exchange Rates
Any computation of currency equivalents required by this policy
shall utilize the method set forth in Article l1l, section 1.
3.
Cancellation
This policy may not be cancelled by either party, except that
CITI may cancel for nonpayment of Pre mium upon twenty days
In such case, this policy shall
written notice to the Insured.
Initio and no claim shall be compensable, whether
be void gi
arising before or after the due date of the Premium.
4.
Non-Assignment
The insured shall not assign or transfer this policy or the
benefits or obligations thereof to any other party or person,
The Insured may, with CITI's
except with CITI's prior consent.
prior agreement, require any payments hereunder to be made to a
named loss payee, all the Insured's obligations under this policy
remaining unaffected.
5.
Other Insurance
The insurance provided under this policy shall be excess over any
other insurance or indemnity covering the same event of loss.
6.
Notice and Modification
All notices under this policy shall be in writing and delivered
to responsible officers of the parties at the addresses indicated
This policy may be modified only by
in the Declarations.
written, mutual consent of the parties.
7.
Governing Law
This policy shall be governed by the laws of New York state.
8.
Arbitration
Any dispute relating to this policy shall be settled by
arbitration in New York, New York according to the then
American
the
Rules of
Arbitration
Commercial
prevailing
initiates
Insured
the
Unless
Association.
Arbitration
arbitration, CITI's liability with respect to any claim matter
shall expire one year after CITI notifies the Insured of CITI's
A
determination concerning an application for compensation.
decision by an arbitrator or arbitral panel shall be final and
binding, subject to the Maximum Liability limit.
lj3
CITCORPOINSURANCE
Policy Number :
: EX 4/87
Form
CONTRACT FRUSTRATION INSURANCE
FOR EXPORTERS OF GOODS AND SERVICES
between
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
("CIT")
and
(the "Insured")
DECLARATIONS
For purposes of this policy, the terms below are defined as follows:
1.
2.
Policy Period:
Buyer:
3.
Guarantor:
4.
5.
6.
Buyer's Country:
Insured's Country:
Contract:
7.
8.
9.
Policy Currency:
Insured Percentage:
Maximum Liability:
10.
11.
Coverages Elected:
Waiting Period:
12.
13.
Premium:
Endorsements:
The Buyer is a
Buyer.
has guaranteed the obligations of the Buyer.
which
subject to any Per Period Liability limits
added by endorsement.
Perils covered in Art 1.1 & 5:
Perils covered in Art 1.2,3 & 4 :
days
dys
By acceptance of this policy the Insured agrees that all statements
contained in the Application a nd the above Declarations and all written
statements submitted by the insured or Its agents are the Insured's
representations and agreements and that this policy, which includes any
endorsements, constitutes the entire agreement between the parties
concerning the subject matter and supersedes any prior agreement or
understanding.
Agreed and Accepted By CITI
Title:This:
Date:
FL.
h
16t 4
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
CONTRACT FRUSTRATION INSURANCE
FOR EXPORTERS OF GOODS AND SERVICES
Perils Insured
In consideration of the Premium paid by the Insured and subject
to the terms and conditions set forth below, CITI hereby agrees
to compensate the Insured for the Insured Percentage of loss
occurring during the Policy Period resulting solely and directly
from any of the following perils remaining in effect continuously
for the Waiting Period:
1.
Public Buyer Repudiation or Non-Payment
The unjustified repudiation of the Contract or failure to
make any payment due under the Contract by the Public Buyer
and any Guarantor or the material failure by the Public
Buyer and any Guarantor to perform any obligation under the
Contract where
such failure
renders
it commercially
impractical or impossible for the Insured to perform its
obligations under the Contract.
Failure to perform includes
failure by the Public Buyer and any Guarantor to honor a
judgment or arbitral award based upon a repudiation or
failure to perform under the Contract during the Policy
Period; such event of loss shall be considered to occur
during the Policy Period.
2.
Buyer's Country Frustration/License Cancellation
The application of any law, order, decree or regulation
having the force of law in the Buyer's Country, including
cancellation of a valid import license, which directly
prevents further performance of the Contract and is outside
the control of the Insured.
3.
Insured's Country Frustration/License Cancellation
The application of any law, order, decree or regulation
having the force of law in the Insured's Country, including
cancellation of a valid export license, which directly
prevents further performance of the Contract and is outside
the control of the Insured.
4.
War
A state of war, civil war, insurrection, rebellion or
revolution in the Buyer's Country which directly prevents
performance of the Contract for at least six months, thereby
causing termination of the Contract.
5.
Nontransfer of Currency
Inability of the Buyer and/or Insured, after all reasonable
efforts, to effect the transfer of funds outside the Buyer's
Country through any normal currency exchange channel, if
such transfer is necessary
a.
for the Buyer to satisfy a Policy Currency obligation
to the Insured under the Contract, or
b.
for the Insured to repatriate the proceeds of the sale
of equipment or materials in the Buyer's Country which
the Insured
is legally entitled to convert and
repatriate under the terms of the Contract and local
law.
Only after delivery to CITI of the nontransferable currency
shall any compensation be payable.
Exclusions
CITI shall not be liable for any loss caused by or arising from:
1.
Nonperformance by Insured
Material failure by the Insured to perform any obligation
under the Contract or to comply with the terms of any export
or import license or other legal requirement.
2.
Malfeasance by Insured
Wrongful, dishonest or criminal
Insured or its agents.
3.
Insolvency or Financial Default
Insolvency, bankruptcy or financial default of any party
except a Public Buyer or the official exchange control
authority of the Buyer's Country.
4.
Currency Fluctuation
Currency fluctuation or devaluation.
5.
Delays by Insured
Failure by the Insured to attempt the transfer, or take
reasonable steps to cause the Buyer to effect the transfer,
of any funds from the Buyer's Country within thirty days of
the earliest date that the funds were available for
transfer.
6.
Disputes
Any material dispute under the Contract which has not been
finally adjudicated or settled except to the extent that the
Buyer's position Is demonstrably without merit or any final
award or judgment in favor of the Buyer is demonstrably
unjust.
acts or omissions by the
Hc(.0
7.
Breach of Policy
Material breach of any representation, condition,
or covenant of the Insured contained in this policy.
8.
War
Declared or undeclared war (whether before or after the outbreak of hostilities) between any of China, France, Great
Britain, the Union of Soviet Socialist Republics and the
United States of America or between the Buyer's Country and
the Insured's Country.
9.
Physical Damage
Physical damage, including ionizing radiation or contamination by radioactivity from any nuclear fuel or from any
nuclear waste from the combustion of nuclear fuel or the
radioactive toxic, explosive or hazardous properties of any
nuclear assembly or nuclear component thereof.
warranty
Compensation
1.
Basis of Compensation
a.
Repudiation, Non-Payment, Frustration, War
For loss by reason of a peril specified in sections 1,
2, 3 or 4 of Article I, compensation shall be the
Insured Percentage times the amount of
(i)
Post Delivery
legally enforceable debt due the Insured under the
goods
and
performed
for services
Contract
delivered and
(ii)
Pre-Delivery
necessary costs and expenses incurred by the
Insured directly related to performance of the
Contract which have not been paid for by the Buyer
or compensated under (i), plus a deemed profit
factor of ten percent of such costs and expenses,
as of the occurrence of the event of loss, less
b.
or
counter-claim
(x)
off-set
credit,
valid
any
available to the Insured and
(y)
any costs or expenses saved by the Insured by
reason of premature termination or suspension of
its performance under the Contract.
Nontransfer of Currency
For loss by reason of the peril specified in section 5
of Article 1, compensation shall be the Insured
Percentage times the Policy Currency equivalent of the
19C*7
currency of the Buyer's Country sought to be transdue date of the
ferred as of the later of (1) the
obligation or (2) the date the currency of the Buyer's
The equivalent
Country Is deposited for transfer.
value shall be determined by applying the net exchange
rate prevailing in the normal exchange market or
channel through which Policy Currency is generally
available for the type of transaction Involved.
2.
Fines and Penalties
In no event shall compensation include any amount for
governmental fines, duties or taxes or Contract penalties,
including penalties for delay or nonperformance.
3.
Other Compensation
With respect to any event of loss, compensation shall be
reduced by the Insured Percentage of the amount of any other
compensation or monetary benefit realized by the Insured by
reason of the event.
4.
Currency of Payment
All compensation shall
Currency.
5.
Salvage
Any amounts of salvage realized by CITI with respect to a
compensated claim shall be applied first to reimburse CITI
for its out-of-pocket expenses in pursuing salvage and shall
then be divided between the parties according to the Insured
However, to the extent CITI's net
Percentage ratio.
recovery exceeds the amount CITI paid plus its out-of-pocket
expenses, the Insured shall be paid a portion of the excess
determined by dividing the time period between the date of
the loss event and the date of claim payment by the time
period between the date of the loss event and the date the
excess is recovered.
6.
Maximum Liability Limits
Under no circumstances shall CITI be liable in the aggregate
under this policy for more than the amount of Maximum
Under no circumLiability set forth in the Declarations.
under this
aggregate
the
in
liable
be
stances shall CITI
policy for events of loss in any one time period for more
than the amount of any Per Period Liability limit prescribed
for that period by an endorsement.
be
computed
and
paid
in
Policy
Conditions
1.
Notice of Potential Claim
The Insured shall notify CITI promptly, and in no event in
more than 30 days, of any occurrence which could give rise
to a claim.
19%r
2.
Cooperation
The Insured shall take all reasonable steps to avoid or
minimize loss.
Should a claim or potential claim situation
arise, such steps shall include (1) where prudent, ceasing
further performance on the Contract and refraining from new
transactions with the Buyer and (2) taking reasonable steps
to find alternative buyers for the goods or services which
are the subject of the Contract.
The Insured shall
cooperate fully and cause any person or entity within its
power to cooperate fully with CITI in the investigation of
any claim, the resolution of any potential claim situation
and the pursuit of any claim salvage.
Such cooperation
shall Include disclosure of records and documents and the
making available of witnesses. Prior to any claim payment,
the
Insured
will
pursue
all
reasonable
legal,
administrative, judicial and informal means of avoiding or
remedying any event of loss which would be compensable under
this policy. The Insured shall not enter into any agreement
concerning a loss or potential loss without CITI's prior
written consent.
3.
Burden of Proof
The Insured shall have the burden of proof in establishing
its right to any compensation under this policy. Any claim
for compensation shall be submitted within three months of
the expiration of the Waiting Period following the event of
loss and if withdrawn may not be resubmitted.
4.
Assignment and Subrogation
As a condition to any claim payment, the Insured shall
assign to CITI all of the Insured's right, title and
interest in the Contract, goods, equipment, materials and
currency which are the subject of the claim and all related
claims against third parties.
Should
CITI so request, the
Insured shall retain legal title to any interests or claims
to which CITI is entitled.
Any salvage received by the
Insured shall be considered held in trust for CITI and transferred to CITI for apportionment in accordance with Article
l1l, section 5.
Warranties
The Insured warrants and agrees that:
1.
Accuracy of Representations
All written statements submitted to CITI to obtain this
policy are true and correct and no material information has
been withheld.
Should there be any material inaccuracy in
the Insured's representations, CITI may void this policy,
retain the premium paid and refuse to compensate the Insured
for loss occurring prior to the discovery of the material
misrepresentation.
11- 1
11
2.
ValIdity of Contract and Authorizations
The copies of all documents submitted with the Application
are true copies of those documents; the Contract is valid
and fully enforceable In the Buyer's Country; all licenses
and authorizations obtained in connection with the Contract
are valid.
3.
Preservation of Remedies
The Insured will preserve all legal, Judicial and administrative remedies applicable to any claim and furnish
reasonable assistance in maintaining any rights or property
transferred to CITI.
4.
Confidentiality
The Insured will not disclose the existence of this policy
to any third party without CITI's prior consent except in
confidence to the Insured's broker and banker.
5.
Self-Insured Retention
The Insured will remain at risk for any loss resulting from
the perils covered to the extent not insured by this policy.
6.
Modification of Contract
The Insured will not materially modify or amend the Contract
without the prior written consent of CITI.
General Provisions
1.
Declarations
The Declarations and the Application are an integral part of
this policy. For purposes of this policy, the terms defined
in the Declarations shall have the meanings set forth
therein.
2.
Exchange Rates
Any computation of currency equivalents required by this
policy shall utilize the method set forth in Article III,
section 1. b.
3.
4.
Cancellation
This policy may not be cancelled by either party, except
that CITI may cancel for nonpayment of Premium upon twenty
days written notice to the Insured.
In such case, this
policy shall be void ab initio and no claim shall be
compensable, whether arising before or after the due date of
the Premium.
Non-Assignment
The Insured shall not assign or transfer this policy or the
benefits or obligations thereof to any other party or
person, except with CITI's prior consent. The Insured may,
with CITI's prior agreement, require any payments hereunder
to be made to a named loss payee, all the Insured's obligations under this policy remaining unaffected.
2 ~~')
5.
Other Insurance
The insurance provided under this policy shall be excess
over any other Insurance or Indemnity covering the same
event of loss.
6.
Notice and Modification
All notices under this policy shall be in writing and
delivered to responsible officers of the parties at the
addresses Indicated in the Declarations. This policy may be
modified only by written, mutual consent of the parties.
7.
Governing Law
This policy shall be governed by the laws of New York state.
8.
Arbitration
Any dispute relating to this policy shall be settled by
arbitration in New York, New York according to the then
prevailing Commercial Arbitration Rules of the American
initiates
Insured
Unless the
Arbitration Association.
arbitration, CITI's liability with respect to any claim
matter shall expire one year after CITI notifies the Insured
of CITI's determination concerning an application for compenA decision by an arbitrator or arbitral panel shall
sation.
be final and binding, subject to the Maximum Liability
limit.
20 I
Policy Number:
Form
IM 4/87
CONTRACT FRUSTRATION INSURANCE
FOR IMPORTERS OF GOODS
between
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
("CITI")
and
(the "Insured")
DECLARATIONS
For purposes of this policy, the terms below are defined as follows:
Policy Period:
Seller:
Guarantor:
Seller's Country:
Insured's Country:
Contract:
7.
8.
9.
Policy Currency:
Insured Percentage:
Maximum Liability:
10.
11.
Coverages Elected:
Waiting Period:
12.
13.
Premium:
Endorsements:
The Seller Is a
Seller.
which has guaranteed obligations of the Seller.
subject to any Per Period Liability limits added by
endorsement.
Perils covered in Article 1.1 & 5:
Perils covered in Article 1.2, 3, 4 & 6:
days
days
By acceptance of this policy the Insured agrees that all statements contained
in the Application and the above Declarations and all written statements
submitted by the Insured or Its agents are the Insured's representations and
agreements and that this policy, which Includes any endorsements, constitutes
the entire agreement between the parties concerning the subject matter and
supersedes any prior agreement or understanding.
Agreed and Accepted by CITI
Title:
Date:
2 0L
Form IM 4/87
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
CONTRACT FRUSTRATION INSURANCE
FOR IMPORTERS OF GOODS
Perils Insured
In consideration of the Premium paid by the Insured and subject
to the terms and conditions set forth below, CITI hereby agrees
to compensate the Insured for the insured Percentage of loss
occurring during the Policy Period resulting solely and directly
from any of the following perils remaining in effect continuously
for the Waiting Period:
1.
Public Seller's Failure to Perform
The unjustified repudiation of the Contract or material
failure to perform by the Public Seller and any Guarantor
under the Contract, Including a failure to deliver goods,
due to any cause beyond the Insured's control and in circumstances where the Insured is not In material default under
the Contract, to the extent any advance payment of the
Insured is not reimbursed by the Public Seller or any
Guarantor as required by the Contract. Failure to perform
also Includes failure by the Public Seller and any Guarantor
to honor a judgment or arbitral award based upon a repudiation or failure to perform under the Contract during the
Policy Period; such event of loss shall be considered to
occur during the Policy Period.
2.
Seller's Country Frustration/License Cancellation
The application of any law, order, decree or regulation
having the force of law in the Seller's Country, including
cancellation of a valid export license, which directly
prevents further performance of the Contract and is outside
the control of the Insured.
3.
Insured's Country Frustration/License Cancellation
The application of any law, order, decree or regulation
having the force of law in the insured's Country, including
cancellation of a valid import license, which directly
prevents further performance of the Contract and is outside
the control of the insured.
4.
War
A state of war, civil war, insurrection, rebellion or
revolution in the Seller's Country which directly prevents
performance of the Contract for at least six months, thereby
causing termination of the Contract.
70(3
5.
Nontransfer of Currency
Inability of the Seller and/or the Insured, after all
reasonable efforts, to transfer funds outside the Seller's
Country through any normal currency exchange channel, if
such transfer is necessary for the reimbursement of any
advance payment due the Insured in Policy Currency under the
Contract.
6.
Deprivation of Insured's Goods
The application of any law, order, decree or regulation In
the Seller's Country which deprives the Insured of the right
to export from the Seller's Country goods acquired under the
Contract for which title and risk of loss have passed to the
Insured.
II. Exclusions
CITI shall not be liable for any loss caused by or arising from:
1.
Nonperformance by Insured
Material failure by the Insured to perform any obligation
under the Contract or to comply with the terms of any export
or import license or other legal requirement.
2.
Malfeasance by Insured
Wrongful, dishonest or criminal acts or omissions by the
Insured or its agents.
3.
Insolvency or Financial Default
Insolvency, bankruptcy or financial default of any party
except a Public Seller or the official exchange control
authority of the Seller's Country.
4.
Currency Fluctuation
Currency fluctuation or devaluation.
5.
Disputes
Any material dispute under the Contract which has not been
finally adjudicated or settled except to the extent that the
Seller's position is demonstrably without merit or any final
award or judgment in favor the Seller is demonstrably
unjust.
6.
Breach of Policy
Material breach of any representation, condition,
or covenant of the Insured contained In this policy.
7.
War
Declared or undeclared war (whether before or after the outbreak of hostilities) between any of China, France, Great
Britain, the Union of Soviet Socialist Republics and the
United States of America or between the Seller's Country and
the Insured's Country.
warranty
2ZqL
8.
Physical Damage
Physical damage, including Ionizing radiation or contamination by radioactivity from any nuclear fuel or from any
nuclear waste from the combustion of nuclear fuel or the
radioactive toxic, explosive or hazardous properties of any
nuclear assembly or nuclear component thereof.
Compensation
1.
Basis of Compensation
a. Failure to Perform, Frustration, War
For loss by reason of a peril specified in sections 1, 2,
3 or 4 of Article I, compensation shall be the Insured
Percentage times the amount of advance payments reimbursable to the Insured under the Contract for which
goods are not delivered, less
(i)
(ii)
counter-claim
or
off-set
credit,
valid
any
available to the Insured and
any costs or expenses saved by the Insured by
reason of the Seller's non-performance under the
Contract with respect to amounts advanced by the
Insured.
b. Nontransfer of Currency
For loss by reason of the peril specified in section 5 of
Article I, compensation shall be the Insured Percentage
times the Policy Currency equivalent of the currency of
the Seller's Country sought to be transferred as of the
later of (1) the due date of the obligation or
(2) the
date the currency of the Seller's Country is deposited
for transfer.
The equivalent value shall be determined
by applying the net exchange rate prevailing in the
normal exchange market or channel through which Policy
Currency is generally available for the type of transaction involved.
c. Deprivation of Insured's Goods
For loss by reason of the peril specified in section 6 of
Article I, compensation shall be the Insured Percentage
times the price paid for the goods of which the Insured
is deprived.
2.
Fines and Penalties
In no event shall compensation include any amount for governmental
fines, duties or taxes or Contract penalties,
including penalties for delay or nonperformance.
3.
Other Compensation
With respect to any event of loss, compensation shall be
reduced by the Insured Percentage of the amount of any other
compensation or monetary benefit realized by the Insured by
reason of the event.
4.
Currency of Payment
All compensation shall
Currency.
5.
Salvage
Any amounts of salvage realized by CITI with respect to a
compensated claim shall be applied first to reimburse CITI
for Its out-of-pocket expenses In pursuing salvage and shall
then be divided between the parties according to the Insured
However, to the extent CITI's net recoPercentage ratio.
very exceeds the amount CITI paid plus its out-of-pocket
expenses, the Insured shall be paid a portion of the excess
determined by dividing the time period between the date of
the loss event and the date of claim payment by the time
period between the date of the loss event and the date the
excess is recovered.
6.
Maximum Liability Limits
Under no circumstances shall CITI be liable in the aggregate
under this policy for more than the amount of Maximum
Under no circumLiability set forth in the Declarations.
stances shall CITI be liable in the aggregate under this
policy for events of loss in any one time period for more
than the amount of any Per-Period Liability limit prescribed
for that period by an endorsement.
be computed
and
paid
In Policy
IV. Conditions
1.
Notice of Potential Claim
The Insured shall notify CITI promptly, and in no event in
more than 30 days, of any occurrence which could give rise
to a claim.
2.
Cooperation
The Insured shall take all reasonable steps to avoid or
minimize loss. Should a claim or potential claim situation
arise, such steps shall include, where prudent, ceasing
further advances or other performance on the Contract and
The
refraining from new transactions with the Seller.
Insured shall cooperate fully and cause any person or entity
within its power to cooperate fully with CITI in the investigation of any claim, the resolution of any potential claim
Such
situation and the pursuit of any claim salvage.
cooperation shall include disclosure of records and documents and the making available of witnesses. Prior to any
claim payment, the Insured will pursue all reasonable legal,
administrative, judicial and informal means of avoiding or
remedying any event of loss which would be compensable under
this policy. The Insured shall not enter into any agreement
concerning a loss or potential loss without CITI's prior
written consent.
2 Or&
3.
Burden of Proof
The insured shall have the burden of proof in establishing
its right to any compensation under this policy. Any claim
for compensation shall be submitted within three months of
the expiration of the Waiting Period following the event of
loss and if withdrawn may not be resubmitted.
4.
Assignment and Subrogation
As a condition to any claim payment, the Insured shall
assign to CITI all of the Insured's right, title and interest In the Contract and assets which are the subject of the
claim and all related claims against third parties.
Should
CITI so request, the Insured shall retain legal title to any
interests or claims to which CITI is entitled.
Any salvage
received by the Insured shall be considered held in trust
for CITI and transferred to CITI for apportionment in accordance with Article 1ll, section 5.
Warranties
The insured warrants and agrees that:
1.
Accuracy of Representations
All written statements submitted to CITI to obtain this
policy are true and correct and no material information has
been withheld.
Should there be any material Inaccuracy in
the Insured's representations, CITI may void this policy,
retain the premium paid and refuse to compensate the Insured
for loss occurring prior to the discovery of the material
misrepresentation.
2.
Validity of Contract and Authorizations
The copies of all documents submitted with the Application
are true copies of those documents; the Contract is valid
and fully enforceable in the Seller's Country; all licenses
and authorizations obtained In connection with the Contract
are valid.
3.
Preservation of Remedies
The Insured will preserve all legal, judicial and administrative remedies applicable to any claim and furnish
reasonable assistance in maintaining any rights or property
transferred to CITI.
4.
Confidentiality
The Insured will not disclose the existence of this policy
to any third party without CITI's prior consent except in
confidence to the Insured's broker and banker.
5.
Self-insured Retention
The Insured will remain at risk for any loss resulting from
the perils covered to the extent not insured by this policy.
6.
Modification of Contract
The Insured will not materially modify or amend the Contract
without the prior written consent of CITI.
Vi. General Provisions
Declarations
The Declarations and the Application are an integral part of
this policy. For purposes of this policy, the terms defined
in the Declarations shall have the meanings set forth
therein.
2.
Ex!hange Rates
Any computation of currency equivalents required by this
policy shall utilize the method set forth in Article Ill,
section 1.b.
3.
Cancellation
This policy may not be cancelled by either party, except
that CITI may cancel for nonpayment of Premium upon twenty
days written notice to the insured.
In such case, this
policy shall be void ab initio and no claim shall be compensable, whether arising before or after the due date of the
Premium.
4.
Non-Assignment
The Insured shall not assign or transfer this policy or the
benefits or obligations thereof to any other party or person, except with CITI's prior consent.
The Insured may,
with CITI's prior agreement, require any payments hereunder
to be made to a named loss payee, all the Insured's obligations under this policy remaining unaffected.
5.
Other Insurance
The Insurance provided under this policy shall be excess
over any other insurance or Indemnity covering the same
event of loss.
6.
Notice and Modification
All notices under this policy shall be in writing and
delivered to responsible officers of the parties at the
addresses Indicated in the Declarations. This policy may be
modified only by written, mutual consent of the parties.
7.
Governing Law
This policy shall be governed by the laws of New York state.
8.
Arbitration
Any dispute relating to this policy shall be settled by
arbitration in New York, New York according to the then
prevailing Commercial Arbitration Rules of the American
Arbitration Association.
Unless the insured
initiates
arbitration, CITI's liability with respect to any claim
matter shall expire one year after CITI notifies the Insured
of CITI's determination concerning an application for comA decision by an arbitrator or arbitral panel
pensation.
shall be final and binding, subject to the Maximum Liability
limit.
Policy Number :
Form
: COG 4/87
INSURANCE
FOR
CALLING OF ON-DEMAND GUARANTEE
between
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
("CITI")
and
(the "Insured")
DECLARATIONS
For purposes of this policy, the terms below are defined as follows:
1.
2.
Policy Period:
Buyer:
3.
4.
5.
Buyer's Country:
Insured's Country:
Contract:
6.
7.
8.
9.
10.
11.
Guarantee:
Bank:
Counter-Indemnity:
Policy Currency:
Insured Percentage:
Maximum Liability:
12.
13.
14.
Waiting Period:
Premium:
Endorsements:
The Buyer is a
Buyer.
subject to any Per Period Liability limits
added by endorsement.
______________________
days
By acceptance of this policy the insured agrees that all statements
contained in the Application and the above Declarations and all written
statements submitted by the Insured or Its agents are the Insured's representations and agreements and that this policy, which includes any
endorsements, constitutes the entire agreement between the parties concerning the subject matter and supersedes any prior agreement or understanding.
Agreed and Accepted By CITI
Title:
Date:
Form COG 4/87
CITICORP INTERNATIONAL TRADE INDEMNITY, INC.
50 Tice Boulevard
Woodcliff Lake, New Jersey 07675
INSURANCE
FOR CALLING OF
ON-DEMAND GUARANTEE
Perils Insured
In consideration for the premium paid by the
to the terms and conditions set forth below,
to compensate the Insured for the Insured
occurring during the Policy Period resulting
from any of the following perils remaining
Waiting Period:
Insured and subject
CITI hereby agrees
Percentage of loss
solely and directly
In effect for the
1.
Public Buyer Wrongful Calling
A wrongful calling of the Guarantee by the Public Buyer to
the extent that the amount drawn is In excess of the amount
due the Public Buyer under the Contract.
2.
Calling Permitted under the Contract
A calling of the Guarantee by the Buyer based upon failure
of the Insured to deliver goods or services as required by
the Agreement where such failure is solely and directly
caused by
a. Buyer's Country Frustration/License Cancellation
The application of any law, order, decree or regulation
having the force of law In the Buyer's Country, including
cancellation of a valid import license, which directly
prevents further performance of the Contract and is
outside the control of the Insured.
b. Insured's Country Frustration/License Cancellation
The application of any law, order, decree, or regulation
having the force of law In the Insured's Country,
including cancellation of a valid export license, which
directly prevents further performance of the Contract and
is outside the control of the Insured.
c. War
A state of war, civil war, Insurrection, rebellion or
revolution continuing in the Buyer's Country for at least
six months, which directly prevents further performance
of the Contract.
3.
Failure of Public Buyer to Honor Award
A failure of the Public Buyer to honor an arbitral award or
judgment directing the Public Buyer to pay the Insured any
amount which the Public Buyer has drawn under the Guarantee.
11.
Definitions
1.
Contract
The contract specified
Insured and the Buyer.
2.
Guarantee
The undertaking specified in the Declarations given by a
local bank to the Buyer, in accordance with the Contract.
3.
Bank
The bank specified in the Declarations which the Insured has
caused to give a counter-guarantee to the local bank in respect of the Guarantee.
in
the
Declarations
between
the
4. Counter-Indemnity
The undertaking specified in the Declarations given by the
Insured to the Bank to indemnify the Bank for its payments
to the local bank under the Guarantee.
ill.
Exclusions
CITI shall not be liable for any loss caused by or arising from:
1.
Nonperformance by Insured
Material failure by the Insured to perform any obligation
under the Contract or to comply with the terms of any export
or import license or other legal requirement.
2.
Malfeasance by Insured
Wrongful, dishonest or criminal acts or omissions
Insured or its agents.
3.
Insolvency or Financial Default
insolvency, bankruptcy or financial default of any party
except a Public Buyer or the official exchange control
authority of the Buyer's Country.
4.
Currency Fluctuation
Currency fluctuation or devaluation.
5.
Disputes
Any material dispute under the Contract which has not been
finally adjudicated or settled except to the extent that the
Buyer's position is demonstrably without merit or any final
award or judgment in favor of the Buyer is demonstrably unjust.
6.
Breach of Policy
Material breach of any representation, condition,
or covenant of the Insured contained in this policy.
by the
warranty
7. War
Declared or undeclared war (whether before or after the
outbreak of hostilities) between any of China, France, Great
Britain, the Union of Soviet Socialist Republics and the
United States of America or between the Buyer's Country and
the Insured's Country.
8.
IV.
Physical Damage
Physical damage, including Ionizing radiation or contamination by radioactivity from any nuclear fuel or from any
nuclear waste from the combustion of nuclear fuel or the
radioactive toxic, explosive or hazardous properties of any
nuclear assembly or nuclear component thereof.
Compensation
1.
Basis of Compensation
For loss by reason of a peril specified In section 1 or 2 of
Article I, compensation shall be the Insured Percentage
times the amount which the Insured is required to pay the
Bank as a consequence of the event of loss, exclusive of any
For
interest payable from the calling of the Guarantee.
loss by reason of the peril specified in section 3 of
Article I, compensation shall be the insured Percentage
times the amount of the award or judgment the Buyer has
Under no circumstances shall CITI be
failed to honor.
liable In the aggregate under this policy for more than the
amount of Maximum Liability set forth in the Declarations.
2.
Fines and Penalties
In no event shall compensation Include any amount for
governmental fines, duties or taxes or Contract penalties,
including penalties for delay or nonperformance.
3.
Other Compensation
With respect to any event of loss, compensation shall be reduced by the Insured Percentage of the amount of any other
compensation or monetary benefit realized by the insured by
reason of the event.
4.
Currency of Payment
All compensation shall
currency.
5.
Salvage
Any amounts of salvage realized by CITI with respect to a
compensated claim shall be applied first to reimburse CITI
for its out-of-pocket expenses In pursuing salvage and shall
then be divided between the parties according to the Insured
However, to the extent CITI's net recoPercentage ratio.
very exceeds the amount CITI paid plus Its out-of-pocket
expenses, the Insured shall be paid a portion of the excess
determined by dividing the time period between the date of
be computed
and
paid
in
Policy
the payment under the Counter-Indemnity and the date of
claim payment by the time period between the date of the
payment under the Counter-indemnity and the date the excess
is recovered.
6. Maximum Liability Limits
Under no circumstances shall CITI be liable in the aggregate
under this policy for more than the amount of Maximum
Liability set forth in the Declarations.
Under no circumstances shall CITI be liable in the aggregate under this
policy for events of loss in any one time period for more
than the amount of any Per Period Liability limit prescribed
for that period by an endorsement.
V.
Conditions
1.
Notice of Potential Claim
The Insured shall notify CITI promptly, and in no event in
more than 30 days, of any occurrence which could give rise
to a claim.
2. Cooperation
The Insured shall take all reasonable steps to avoid or
minimize loss, Including, where prudent, ceasing further
performance on the contract and refraining from new
transactions with the account party.
The insured shall
cooperate fully and cause any person or entity within its
power to cooperate fully with CITI in the investigation of
any claim, the resolution of any potential claim situation
and the pursuit of any claim salvage.
Such cooperation
shall include disclosure of records and documents and the
making available of witnesses. Prior to any claim payment,
the Insured will pursue all reasonable legal, administrative, judicial and informal means of avoiding or
remedying any event of loss which would be compensable under
this policy. The Insured shall not enter into any agreement
concerning a loss or potential loss without CITI's prior
written consent.
3.
Burden of Proof
The Insured shall have the burden of proof in establishing
its right to any compensation under this policy. Any claim
for compensation shall be submitted within three months of
the expiration of the Waiting Period following the event of
loss and if withdrawn may not be resubmitted.
4.
Assignment and Subrogation
As a condition to any claim payment, the insured shall
assign to CITI all of the Insured's rights against third
parties related to the loss and any other interests which
are an offset to the loss.
Should CITI so request, the
Insured shall retain legal title to any interests or claims
to which CITI is entitled.
Any salvage received by the
Insured shall be considered held in trust for CITI and
transferred to CITI for apportionment In accordance with
Article IV, section 5.
VI.
Warranties.
The Insured warrants and agrees that:
VII.
1.
Accuracy of Representations
All written statements submitted to CITI to obtain this
policy are true and correct and no material information has
Should there be any material Inaccuracy in
been withheld.
the Insured's representations, CITI may void this policy,
retain the premium paid and refuse to compensate the insured
for loss occurring prior to the discovery of the material
misrepresentation.
2.
Validity of Contract and Authorizations
The copies of all documents submitted with the Application
are true copies of those documents; the Contract Is valid
and fully enforceable in the Buyer's Country; all licenses
and authorizations obtained In connection with the Contract
are valid.
3.
Preservation of Remedies
The Insured will preserve all legal, judicial and administrative remedies applicable to any claim and furnish
reasonable assistance in maintaining any rights or property
transferred to CITI.
4.
Confidentiality
The Insured will not disclose the existence of this policy
to any third party without CITI's prior consent except in
confidence to the Insured's broker and banker.
5.
Self-insured Retention
The Insured will remain at risk for any loss resulting from
the perils covered to the extent not insured by this policy.
6.
Modification of Contract
The Insured will not materially modify or amend the
Contract, the Guarantee or the Counter-Indemnity without the
prior written consent of CITI.
General Provisions.
1.
Declarations
The Declarations and the Application are an integral part of
this policy. For purposes of this policy, the terms defined
in the Declarations shall have the meanings set forth
therein.
2.
Extension of Policy Period
If it appears prudent to extend the Guarantee and CounterIndemnity, the Insured may extend the Policy Period for up
to six months by (1) notifying CITI of the extension prior
to expiration of the original Policy Period and (2) paying
CITI, within fifteen days of commencement of the extension,
an additional r rata premium.
3. Cancellation
This policy may not be cancelled by either party, except
that CITI may cancel for nonpayment of Premium upon twenty
days written notice to the Insured.
In such case, this
policy shall be void ab initio and no claim shall be compensable, whether arising before or after the due date of the
Premium.
4.
Non-Assignment
The insured shall not assign or transfer this policy or the
benefits or obligations thereof to any other party or
person, except with CITI's prior consent. The Insured may,
with CITI's prior agreement, require any payments hereunder
to be made to a named loss payee, all the Insured's obligations under this policy remaining unaffected.
5.
Other Insurance
The insurance provided under this policy shall be excess
over any other insurance or indemnity covering the same
event of loss.
6.
Notice and Modification
All notices under this policy shall be in writing and delivered to responsible officers of the parties at the
addresses indicated in the Declarations. This policy may be
modified only by written, mutual consent of the parties.
7.
Governing Law
This policy shall be governed by the laws of New York state.
8.
Arbitration
Any dispute relating to this policy shall be settled by
arbitration in New York, New York according to the then
prevailing Commercial Arbitration Rules of the American
Insured initiates
Association.
Unless the
Arbitration
arbitration, CITI's liability with respect to any claim
matter shall expire one year after CITI notifies the Insured
determination concerning an application for
of CITI's
compensation. A decision by an arbitrator or arbitral panel
shall be final and binding, subject to the Maximum Liability
limit.
215
Appendix 4
Sample Agreement Between an
Insurer and Host Government
COSTA RICA
INVESTMENT GUARANTIES
Agreement signed at San Jose November
into force October 24,
Entered
Agreement between the Governments of
America and Costa
of
the Government of the
The Government of
of
Government
friendly
recognizing
capital
further
that
in
development
guaranties
America and
the
strengthen
the
two countries,
and
States of
desiring
the
unite
investments
originating
the
the United
which
relations
the United States
United States.
Rica,
Costa
1968;
1969
investment
Rica relating to
of
22,
to
in Costa
the United
Rica
States of
of
private
America can
of Costa Rica's economic resources
216
and productive
capacity,
and
production
an
bringing
increase
about a
in trade
States and Costa Rica, have agreed as
1.
The Government of
the Government
either
of
costa
one, consult
will
guarantee an
in
its
the United
follows:
the United
States of America and
Rica shall,
upon the
request of
in
Costa Rica
the United States may guaranty.
The Government
not
between
concerning investments
which the Government of
2.
rise
the
of
investment
United States of
America
in Costa Rica unless
the
Government of Costa Rica approves the activity to which the
investment relates.
3.
laws
of Costa Rica, and pursuant to an
an investor
States
of
America
including credits
rights which the
his
business
entitling
to
transfers
the
(a)
in
activities
investor
investment
the Government
legal
such
investor
has
in
and the
with the Constitution
in accordance
If,
currency
currency;
(b)
or may have,
Costa
to payments
Rica
under
of
of
guaranty,
the
Costa
any
Rica,
claims
resulting
or
United
from
the
or
from
events
investment
217
guaranty;
in any
situated
or
(c)
all
property
or
(real
part of
the interest of an investor
or personal,
in Costa Rica,
tangible
the Government of
or
intangible)
Costa Rica
recognize such transfer as valid and operative.
the
of
subrogation envisaged herein shall
the United
the
States greater
enterprise
for
granted than the
4.
Sums
which
rights of
in
legal
credits
in such currency,
United
states of
by
to those
used
of
virtue
property,
under an investment
Government of
or use
treatment accorded
United States of
by
including
the
transfer
of
of
a
or
rights,
Costa Rica
thereof,
of
claims
be accorded
with respect to
no
less favorable
citizens
of
the
from activities comparable
investor, and such sums may be
the Government
America for any of
was
the Government of
guaranty shall
to funds
America derived
carried out by the
freely
guaranty
Cost Rica,
of
acquired by
transferred
than the
investment
currency
from
exchange, repatriation
the assets of
the subrogating investor.
currency or
treatment by the
Nothing in
the Government
rights against
the
America
sales
give
will
of
its expenditures
the United
in
Cost Rica.
States
of
218
or applica tion
interpretation
Agreement or arising from
investment
an
of
the
negotiations between the
two
agree
unable to
the
matter shall
to
Government,
be referr ed,
a
internatio nal
arbitrator within the per iod
Government has
indicated
shall,
Governmen ts,
the
3
of
request
to the
the two
If
of an
either
to submit the q uestion
International
of
either
of
C ourt of
t he
two
designate the arbitrator.
Recognition
6.
Clause
at
the
either
the selection
on
des ire
to arbitration, the Presi dent of
Justice
law.
thre e months after
of
its
are
mutual
by
selected
settl ement according
to agree
are unable
Governments
three mon ths
upon th e initiative of
and bi nding
principles of
of
in
such dispute or claim,
arbitrator
sole
be settled
th e two Governmen ts
on a sett lement of
agreement for final
applicable
the period
negot iation,
request for
of either
shall
possible
Wit hin
negotiations.
after a
the request
of
in so far as
and
this
provisions of
the
eve nts causing payment under
Governments, be the subjec t
those
of
at
guaranty shall,
Governments
the
between the Government regarding
Any dispute
5.
this
following conditions:
of
the
Agreement
subrogations
shall
be
mentioned
subject
to
in
the
219
Agreement shall
this
the United States of
give the Government of
rights
of
the provisions
None of
a.
other
America
to any
investor with respect
than those held by the
petitions, claims, or rights to which the Government of
the
United States has been subrogated.
b.
not
may
invest or
territory,
entitled
any
right,
the
under
laws
the appropri ate
or
when
understood that
participation
Government of
refers
the
Cost
right,
titl
such
but
valid;
receiv ing
title,
property within
Government of
any c laim
of
to
participation that
titl e or
of
nsfer
not b e
obtaining and
through
in any
to the
shall
Government
tra
the
participation
America
have
the Unite
Government of
the
America of any right,
States of
an
the acquisition by
permit
Rica do
of Costa
laws
the constitution and
When
which
of
Costa
the
transfer
be
may
the State
of
legal
channels,
compensat ion
to
lands
within
United States will
not
,
Costa
for
Ri ca,
Costa
from
investor's right
be
val id
for
It is
participation in such property.
the
t hat
to
investor
Rica
or
e,
St ates of
the United
the
Ri can
tit le,
Rica,
seek to
or
the
acquire
220
or possession,
title, dominion,
such
such national
properties
them
their
of
This agreement
the note
been
in
procedures
of Costa
into force,
it shall
'9
October, 24,
1969
receiving
the United
States,
form, consistent
shall
to acquire
laws.
enter
into force on
of
of the United States of
approved
to dispose of
to persons qualified
whereby the Government
the Government
and the
permit
will
after
them
of
laws,
fair value pursuant to the provisions
them in accordance with such
7.
to
most expeditious
in the
laws of Costa Rica,
the
Rica
Costa
Government
from the
with obtaining
of
of
belonging
still
compensation
transferring
its
make the necessary arrangements
to
investors
to
territory.
Government
the
Agreement,
ownership
its Constitution,
Pursuant to
c.
of
in any way to acquire title of
lands, or
any part of
tenancy, or occupancy
conformity
Rica.'
replace and
with
Costa Rica
America that
the
When this
terminate
the date
informs
it has
constitutional
Agreement enters
the Agreement on
221
investment
dated February 23
26,
February
provisions
guaranties
to
prior
and
this
of
issued
date, and
to
Agreement after
its
witness whereof,
In
authorized for the
Done
languages,
day of
duplicate,
in
both
investment
but
issued
in
effecti ve date.
representatives,
sign this Agreement in SAn
equally
in
the
English
authentic, on this
and
Spanish
twenty second
November, 1968.
(SIGNED) For
the Government of
America. Clarence A.
Rica, Fernando Lara, Minister of
TIAS 3201;
the United States
of
Boonstra, Ambassador.
(SIGNED) For the Government
50
the
the REpublic of Costa Rica.
of
capital
Jose,
to
those
the re spective
purpose,
note of
Agr eement
this
conformity with
ef fective
its
apply
shall
notes
forward
date
that
from
agreement
in
conformity with th is
duly
and
1955,"*
with the related
1955,
25,
of
exchange
by an
effected
guaranties
6 UST 665
of
the Republic of
Foreign Relations.
Costa