International Credit

What is international credit?

International credit means providing monetary or material resources by one countries to others. Creditors and borrowers are companies, banks, governements, national institutions, international and regional organizations.

Glossary of International Economics give two definitions of credit:
1. Recorded as positive (+) in the balance of payments, any transaction that gives rise to a payment into the country, such as an export, the sale of an asset (including official reserves), or borrowing from abroad. Opposite of debit.
2. A loan. For example, a trade credit.

Integral points of international credit are as following:

- Recurrency
The amount borrowed must be returned after the term set in the credit agreement. It provides the renewal of creditor’s resources and lets him continue his business.
In times of socialist economy in USSR existed permanent loans granted by government to agricultural industry. Actually, it was a form of government subsidizing, because credits were never returned. Moreover, the directors were not motivated to use the money effectively, so most of it was spend up and used for personal needs.

-Urgency
Credits are always granted for a certain period of time. Credits can be extraurgent (1 day - 3 months), short-term (3 months - 1 year), middle-term (1 year - 5 years), and long-term (up to 20 years). Prolongation of credit is possible but it usually results in raise of interest rate.

- Payment required
The borrower must return the summ of credit as well as payment for the right of resources use, and as a compensation of creditor’s alternative expanses. The main index of such payment is interest rate - % of credit to be returned to creditor besides the credit amount itself.

- Security
This principle states the necessity to protect the creditor from borrower’s violation and refusal to fulfil his fincancial obligations. It has form of mortgage or bid guarantee. If the borrower is not able to pay the credit back, his property (house, factory, stocks) can be withdrawn judicially.

- Purpose
International credits are always granted for the particular purposes, i.e. certain investment projects. Digression of spendings from the project is prohibited, and the investment objects are stated in the credit agreement.

- Differentiation
That means that there are no universal terms for every borrower, and the credit terms are defined individually for each borrower on the basis of his project, paying capacity, history of crediting, security, etc.

Example here:

EBRD (European Bank for Reconstruction and Development) will invest $7.5 million in the capital of ZAO Viatra, fourth largest street-banner operator in Moscow.

The funds will be used to make acquisitions of new sites and their build out and/or acquire stakes in the Russian street-banner operators. Besides, the participation in the company’s capital will facilitate introduction of high standards of corporate governance. Basically, this is a credit for development of infrastructure made in order to advance economy of Moscow and Russia to the realities of market economy. Major point is the development of environmental issues on this project

Why international credit is important?

Historically, international credit has served the needs of international trade by aiding importers and exporters. Accordingly, importers are granted credit to make advanse payments - this quickens the process of trade and gives exporters resources to renew their trade stock. Exporters also grant international credit when they offer goods to importer with delay of payment.

Later, and now, international credit also covers the processes of real investment, balance of payment regulation and external debt service.

Major international economic and financial organizations provide credits for developing countries to encourage their development towards global market economy and help them get out of economic difficulties after wars, recessions, disasters, etc. Integrational groups like European Union provide low-interest credits for neighbouring countries to ensure security, stability at it borders and set up the basis for future cooperation in economy, policy, ecology, security and migration.

Major international organizations - creditors

One of the most important is obviously, the World Bank and its subsidiaries:
- International Bank for Reconstruction and Development (IBRD)
- International Finance Corporation (IFC)
- International Development Association (IDA)
- Multilateral Investment Guarantee Agency (MIGA)
- International Centre for Settlement of Investment Disputes (ICSID)

MBRD is created to credit the developing countries with average level of income (like most of Eastern Europe). Resources for its credits are taken from international capital markets together with member-countries fees.

IFC supports private enterprises in the developing countries by granting credits and helping to obtain funds from private investors.

IDA is granting low-interest credits to underdeveloped countries (Afghanistan, Armenia,Bosnia-Herzegovina, Ethiopia, Nicaragua,
Vietnam, etc.) that are not able to use high-interest and long-term loans from EBRD. The credites are formed from fees of World Bank members.

ICSID is incorporated to World Bank Group for arbitration of investment disputes between foreign investors and governments of borrowers.

MIGA promotes foreign direct investment into developing countries by insuring investors against political risk, advising governments on attracting investment, sharing information through on-line investment information services, and mediating disputes between investors and governments. MIGA also requires host country government approval for every project. MIGA tries to work with host governments - resolving claims before they are filed.

International Monetary Fund (IMF)
is an international organization that oversees the global financial system by observing exchange rates and balance of payments, as well as offering financial and technical assistance when requested. Its headquarters are located in Washington, D.C.

The primary mission of the IMF is to provide financial assistance to countries that experience serious financial difficulties. Member states with balance of payments problems may request loans and/or organizational management of their national economies. In return, the countries are usually required to launch certain reforms.

For example, nations with severe budget deficits, rampant inflation, strict price controls, or significantly over-valued or under-valued currencies run the risk of facing balance of payment crises in their future. Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.

Well, now you can imagine a general picture of what international credit is.
To learn more, we recommend you to study the following sources:
World Bank Group
International Monetary Fund Website
Financial Market (Wikipedia)
International economic organizations