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Benefits of coverage

In view of the new requirements imposed on banks by the Basel Regulations (Basel II) for minimum capital requirements the lending practice for refinancing foreign investments will sustainably change. If financing conditions depend on the investor’s rating in combination with the project abroad, it seems reasonable to assume that investment coverage of the project equally plays a role.

Since established German law (KonTraG) requires adequate measures to limit risks, the use of guarantee schemes is a crucial element of entrepreneurial provision for risks within the risk management. Provision for risks is a very important entrepreneurial decision on account of the long-term capital commitment of investments and the high complexity of projects abroad.

Consequently, the significance of limiting political risks in connection with investments abroad is increasingly recognized by the business community. To collateralize refinancing, especially banks demand an effective protection against the consequences of war, civil disturbance, terrorist acts, coup d’état, nationalizing tendencies and transfer problems. The guarantee scheme thus creates the preconditions, under which banks are prepared to grant loans. Claims under guarantees may have to be assigned to the banks forming part of the security measures.

Another advantage having an investment guarantee is the flanking by the German government. Its intervention on behalf of the German investor prevents losses or reduces their consequences. In addition, the German government is prepared to share the costs of loss prevention.

As investment guarantees support German enterprises in securing foreign supply sources for raw materials and intermediate products, in maintaining marketing opportunities and in finding access to new sales markets, the guarantee scheme equally benefits the continuity of entrepreneurial activity in Germany. Subcontracting abroad is an advantage enabling German enterprises to sell their products at competitive prices on the world market. In the context of worldwide competition entrepreneurial activity abroad can therefore secure and strengthen the competitiveness of enterprises at home and thus secures jobs in Germany. So the promotion of direct investments by the German Government contributes to securing the German location.

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