Export credit guarantees: Information evaluation, valuation, and portfolio management

This dissertation examines information evaluation, guarantee valuation, and portfolio management for a government export credit guarantee program. The first aspect examined is the evaluation of information contained in country risk ratings. The performance of ratings has seldom been analyzed, and the use of poor ratings could adversely affect credit allocation and pricing decisions. Desirable aspects and characteristics of ratings used as forecasts of the probability of default on guaranteed credit are identified and evaluated. The most prominent commercially available ratings are modeled and assessed for their forecasting abilities. The results show the potential problems with using ratings as direct probability indicators and that creditors benefit if they can use calibrated forecasts that make a distinction between high- and low-creditworthy countries.;The second aspect examined is the empirical valuation of export credit guarantees. Without a reliable method to estimate guarantee values, country-specific cost/benefit decisions are difficult to assess. However, guarantee valuation is difficult because the repayment capacity of recipient countries is not well understood. A method is developed to identify the repayment capacity of recipient countries by combining forecasts of the likelihood and severity of potential claims. The results provide a conceptual framework for valuing guarantees, and are used in an application to export credit guarantees extended by the Commodity Credit Corporation.;The third aspect examined is the management of a guarantee portfolio. A framework is needed to understand the tradeoff between extending guarantees and their expected liability to the guarantor. The actions of a guarantor are modeled, and it is shown that a risk-efficient guarantee program would operate on a frontier. The existing General Sales Manager guarantee portfolio is then modeled, and the portfolio's sensitivity to potential policy changes and external shocks is examined. The results quantify the impacts of changes in activity level, coverage, and other terms.