Our governments are investing billions in the financial sector to keep our economy going. The main objective is to keep the supply of badly needed credit lines open so trade continues as before.
It is therefore amazing to observe that (at least in the Netherlands) they do not see the second big blockade in trade: credit insurance. Atradius, the former NCM (“Nederlandse Credietverzekerings Maatschappij”) is one of the major insurers of trade credits. In a highly unusual and abrupt manner Atradius has informed its clients by email of the severe reduction of credit limits, mostly for a large number of small companies.
How does this credit insurance work? Lets take a machine builder who can export a machine to another country. The buyer does not pay 100 % in advance ofcourse. A 100 % garantuee of payment by a Dutch bank (letter of credit) is often difficult to get because the buyer has to garantuee the payment for 100 % with a local (foreign) bank. The machine builder must invest in raw materials and components, time of his staff and runs a risk that the machine is not paid for when completed. Enter the credit insurance company. They insure the risk for non-payment by the foreign company, up to a certain limit, the so-called credit limit. The combination of the credit insurance and a certain amount of prepayments by the buyer gives the bank of the machine builder the comfort to finance the work-in-progress.
The same more or less applies to transaction within the Netherlands.
So when Atradius suddenly reduced the credit limits on many (foreign) companies the direct effect was that banks will not finance new orders any more.
Another variation is experienced by a friend of mine. He imports textiles. They are manufactured for him in Turkey, shipped to Romania for processing and imported to the Netherlands for the big retailers. Everything suddenly stops. The Romanian factories will go bankrupt. My friend is contemplating to stop his business.
It is frustrating to see that in most cases the market demand is still there. Bankruptcies caused by shifting consumer demands or lousy management is part of our system.
Bankruptcies caused by removal of the “oil” out of the system is bad public policy.
