The GSM-102 program administered by the Foreign Agricultural Service (FAS) of USDA provides export credit guarantees for credit extended by private U.S. banks to approved foreign banks for purchases of U.S. agricultural products by foreign buyers. In 2005 after the initial WTO ruling in the case, USDA established “risk-based” fees on loans intended to cover all long-term operating costs and loan losses and limited loan length to a maximum of three years. The U.S. has agreed to make additional modifications and engage Brazil in further technical discussions.
The program guarantees credit extended to pre-approved foreign banks using dollar-denominated, irrevocable letters of credit. The guarantee normally covers 98 percent of the loan principal and part of the interest which allows U.S. financial institutions to offer competitive credit terms based on the London Inter Bank Offered Rate (LIBOR). Contract arrangements must require exports within 90 calendar days of registration or by Nov. 30, 2010, whichever is earliest.
Eligible agricultural commodities include the usual ones like grains, oilseeds, cotton, meat, eggs, breeding animals, fruits, vegetables and hay. Less common products include farm raised antlers from elk, brine shrimp eggs, honey bees and worms for composting. Processed and prepared items include beer and wine, dairy products, dough, pasta and snack foods. Commodities must be produced in the U.S., and for high-value agricultural products, 90 percent or more of the agricultural components by weight, excluding packaging and added water, must be U.S. produced.
The last three years have seen a resurgence of interest in the GSM-102 program with higher commodity prices and the economic recession which reduced credit availability. During fiscal year (FY) 1998 and FY1999 credit guarantees were just short of $4.0 billion per year. The annual average declined to just under $3.0 billion for FY2000-FY2004. By FY2006 and FY2007 the annual average was $1.4 billion. Guarantees registered increased to $3.1 billion in FY2008 and $5.3 billion in FY2009. The total will likely be lower this year, FY2010, with a total of $1.7 billion through March 31. The program is budgeted at $5.4 billion for this year.
After the settlement was announced on April 6, FAS stated that it was canceling all unutilized balances of the GSM-102 program made in FY2010 effective April 9 and a new risk-based fee schedule would be established. As of April 1, FAS had announced $2.7 billion of available guarantees to participating countries and the cancellation affected about $1.0 billion of potential guarantees.
A new fee schedule was announced by FAS on April 9. Importing countries are rated on credit risks on a scale of 0-6 with zero having the lowest risk; 79 countries have an established rating. Representative risk ratings include Singapore at 0, Chile at 1, South Korea at 2, Columbia at 3, Turkey at 4, the Dominican Republic at 5 and Uganda at 6. Annual premiums for coverage range from $0.298 per $100 of loan amount for a 0 rated country to $1.209 per $100 of loan amount for a 6 rated country. Countries ranked 0-3 can secure loans up to 30 months in length, 4 up to 24 months, 5 up to 18 months and 6 up to 12 months.
On April 20, FAS announced new allocations of $860 million of credit guarantees. The Caribbean region was allocated $60 million, Central America $60 million, China/Hong Kong $50 million, Eurasia $60 million, Mexico $60 million, the Middle East/North Africa $85 million, South America $60 million, South Asia $25 million, S. Korea $150 million, Southeast Asia $60 million, Southeast Balkans $25 million, Sub-Saharan Africa $75 million and Turkey $80 million.
Under the previous allocations for FY2010, South Korea had the largest guarantees registered at $435.7 million with feed grains $220 million and wheat $87.0 million. Turkey had $300 million with rice $86 million, oilseed $84 million and cotton $71 million. The Eurasia region (Kazakhstan, Russia, Ukraine) had $219.7 million with $16 million beef, $70 million pork and poultry meat $134 million and the Middle East/North Africa region had $151.8 million with oilseeds and protein meals $95 million and feed grains $47 million. The U.S. export promotion group Cotton Council International has calculated based on data collected by FAS that $110.1 million in guarantees involving cotton had been registered for FY2010 as of April 1.
Export credit programs are among the issues being addressed by the Doha Round of WTO trade talks as part of export competition programs. The proposed language for an agreement would limit developed countries to credit programs of up to 180 days and self-financing by recovering costs to a commercially viable standard over a rolling period of four or five years. Had the Doha talks been completed by now, the GSM-102 program would have been a non-issue. With the talks on hold for now and no prospects for conclusion, the proposed language may become the de facto standard the Brazilian government will push towards in talks with the U.S.
Given the recent increase in use of the GSM-102 program, a valid concern is whether now is the time to sharply curtail it. Countries like South Korea could certainly pay cash or borrow at commercial banks without the guarantee, but the same is not likely true for countries lower on the GSM-102 ratings. Some other international group could develop a program, but the GSM-102 program is operational with years of experience dealing with the details that are part of any international lending program. There may be a role for a representative of the WTO to work with the Brazilian and U.S. governments to fashion a transition that respects the WTO dispute ruling and the Doha language while meeting the current credit needs of countries caught in the economic transition.