In the aftermath of the international debt crisis of the 1980s, unconventional forms of trade and finance experienced a resurgence. In particular, countertrade (a reciprocal form of trade in which an exporter commits himself to making an offsetting import) rose, reaching 10–20% of world trade. In Discussion Paper No. 1185, Research Fellow Dalia Marin and Monika Schnitzer show that countertrade can be used to finance an import of an East European or developing country from a developed country even if this deal cannot be financed with a traditional credit arrangement due to the sovereign debt problem. The basic idea is that the import (from the perspective of the exporter in the developed country) is used as collateral.

The authors develop a dynamic model in which creditors and debtor interact repeatedly. This allows a comparison of the enforcement mechanisms discussed by the sovereign debt literature, such as `reputation' effects and the threat of trade sanctions, with those if trade credits are `collaterized' through countertrade agreements. They show that countertrade which gives seniority rights on export goods offers a more viable alternative to sustain sovereign lending to highly indebted countries. In the second part of the paper, the authors confront their theory with survey data of 230 contracts signed by developed country firms, which use Austria as their basis for countertrade transactions. From the model, they derive several hypotheses of the factors that drive the value of the collateral generated by countertrade agreements relative to the value of the trade credit (export value). The collateral will need to be larger relative to the export, first, the lower the creditworthiness of the developing or East European country (LDC/EE); second, if the developed country firm signs the agreement with the LDC/EE only once rather than repeatedly; third, the better the LDC/EE's export opportunities; and lastly, the less the LDC/EE depends on its imports. In the empirical test, none of these hypotheses are rejected at conventional levels of significance.

Creating Creditworthiness through Reciprocal Trade
Dalia Marin and Monika Schnitzer

Discussion Paper 1185, May 1995 (IT)