Facing an aggressive Russia to the east and a derisive United States to the west, many countries in Europe are urgently trying to bolster their armed forces. The surge in defence spending and military procurement has fuelled a boom for many export credit agencies and export finance banks. Now commercial and public banks – long hesitant to engage with defence – are being urged to embrace the sector. Jacob Atkins reports.
Europe is on a weapons buying spree.
The sight of Russian tank columns rolling through the fields of eastern Ukraine and missiles falling on Kyiv pushed many countries in Europe to take stock of their defence capabilities and reckon with, in some cases, years of under-investment.
Over the last two years, European states have ploughed money into military budgets. In 2024, European defence spending grew by 11.7%, with Germany’s budget alone ballooning by almost a quarter, according to the International Institute for Strategic Studies (IISS).
The return of President Donald Trump to the White House has only heightened a sense of urgency, both because of his chiding of Nato countries for insufficient military funding, and growing doubts over his commitment to the transatlantic alliance that Europe has relied on since the end of the last world war.
While defence had previously been frowned upon due to growing ESG pressures, Ukraine’s fight for survival has recast the debate: European politicians now see a strong defence sector as an essential bulwark against Russia and a potential bright spot at a time when the continent’s industrial powerhouses are shedding jobs under pressure from Asian competition.
In March, the EU announced a defence financing package worth around €800bn, including axing borrowing limits for member states, and a €150bn loan fund.
One of the first acts of German Chancellor-elect Friedrich Merz was to strike a political deal to lift Germany’s debt break to boost the defence budget, which sent defence stocks soaring.
It’s “five minutes to midnight for Europe” Merz said after his party became Germany’s largest at the February 23 election. “My absolute priority will be to strengthen Europe as quickly as possible so that, step by step, we can really achieve independence from the USA.”
The shift is already translating into bigger business for export credit agencies (ECAs) and export finance banks, which have long counted defence as a source of big-ticket deals.
The Berne Union, which collates data from ECAs, says “large defence-related transactions” fuelled medium-to-long-term cover to a “colossal” US$165bn during 2024.
Some ECAs, such as bpifrance, Italy’s Sace and UK Export Finance (UKEF), have traditionally been strong backers of defence deals, reflecting the relative strength of those countries’ arms exports.
UKEF said in its 2023 annual report that the agency is “seeing growing interest in support for defence business from well-rated sovereigns in Eastern Europe” and that it expects the trend to continue.
Europe became the top destination for UK defence export orders in 2023, the UK defence ministry said last year, after five years of Middle Eastern buyers holding the top spot.
Sweden’s EKN has also attributed its recent record guarantee volumes to a big jump in demand from defence exporters, which include Saab and a subsidiary of BAE Systems.
“In the last decade, there wasn’t a lot of defence happening for obvious reasons and now that has changed very quickly. Now we see the volumes actually rapidly increasing,” EKN chief executive Anna-Karin Jatko tells GTR. “It’s taken maybe a year or so and now it’s really mounting up.”
Jatko says while most demand comes from a couple of large firms, there are also around 200 sub-suppliers in Sweden, many of which are SMEs, meaning the “whole sector requires a number of different guarantee types in order to ensure that the full scope of the export actually happens”.
In 2023, EKN provided Skr16.3bn (US$1.5bn) in guarantees for defence projects, accounting for 17% of the agency’s total cover. In the two prior years, defence-related guarantees were so modest that the share was 0%.
Defence deals also pushed volumes higher in neighbouring Norway over the last two years, where ECA Eksfin’s biggest deal in 2023 was the export to Poland of a coastal defence system built by Kongsberg.
Poland, which shares a border with staunch Russian ally Belarus, has been behind many large defence purchases made using export finance. The country became the world’s 15th largest spender on defence in 2024, according to the IISS, climbing five spots in just two years.
The growth has put pressure on ECAs to expand their risk appetite.
Last year, UKEF had to seek the government’s permission to go “significantly” beyond the agency’s normal risk limits to approve £9bn in guarantees covering Poland’s acquisition of an air defence system from MDBA.
The deal also highlighted the secrecy that sometimes surrounds such transactions. Despite the enormous value, UKEF did not issue any public statement about the agreement, which only came to light after GTR published a story based on two short letters quietly posted on the agency’s website in November last year. Even though UK taxpayers will be on the hook should the deal fall over, no details of the financing have been made public, including the interest rate, tenor or commercial banks involved.
But some governments who were previously shy about supporting defence exports are now embracing them. In January, the German government announced it is throwing open its export credit guarantees, operated by Euler Hermes, to a defence industry that it had previously kept at a distance.
In the past, in-principle transactions were taken to the country’s defence ministry for approval, and only then would the export credit unit consider supporting them. In practice, very few deals ever passed muster, mostly those involving ships and submarines. The policy reflected Germany’s deep fear of exporting military equipment to countries that may later use them to wage an offensive war or turn them or their own populations.
“If you look back the last couple of years, the volumes that we cover were not that high,” says Manuel Dircks, Euler Hermes’ head of transportation. “In the past, many of those companies and also financial institutions have regarded us as restrictive”.
The new policy expands permissible exports beyond Nato members to many more countries, although deals involving a small group of countries will still be off-limits.
Dircks tells GTR the overhaul includes several changes.
“The first one is more goods and destinations are eligible, in the sense that we will treat them as standard civilian exports,” he says. “The second one is the conditions are better, so we are now in a position as an ECA to cover long-term financing, irrespective of where the goods are destined for. And the third one is that we streamline the application process”, so it is akin to a regular guarantee application.
Commercial insurers are not subject to the same transparency obligations as publicly owned ECAs, but there are signs they are also profiting from a boom in military procurement.
“The way we underwrite, for instance, defence material deals today is very different compared to what it was three to four, or maybe five years ago,” when it was not attractive, said Pekka Puotunen, chief executive officer in the Nordics for trade credit insurer Coface, at last year’s GTR Nordics event.
“Today, everybody [understands] that we need to support, participate and be either behind the ECAs as reinsurers on this type of transaction, or even in the front,” he said. “The private industry has stepped up, at least on the defence underwriting side.”
Financing bottlenecks
Even with the prospect of government cash pouring in, the defence industry has a longstanding gripe that banks and capital markets often see the sector as too risky. Suppliers of military equipment have found themselves on the wrong side of banks’ growing alertness to ESG risk, which particularly affects SMEs.
“I know from feedback from [defence] SMEs that one of their major causes of concern is environmental, social and governance rules,” James Cartlidge, then-UK defence procurement minister and current shadow defence secretary, said in a 2023 speech.
He claimed such rules have been applied “wholly, misguidedly, in relation to defence”.
Financiers have penalised defence companies “in a multitude of ways – from facing more expensive finance to being denied basic banking facilities”, including current accounts, he said.
Aimie Stone, chief economist with UK defence industry association ADS Group, says the organisation found “that a lot of banks were having, maybe not defence-specific policies, but certain ESG policies that exclude working in defence, because of the weapons angle”.
Most UK high street banks have policies that permit financing to companies in the sector, often with some limitations on the types of goods produced. But there are some notable exceptions, including the world’s largest trade bank, HSBC, which has a blanket policy of not financing the sector.
But even if defence is permitted, companies face steep compliance obstacles.
At the end of 2022, as the pandemic ended and tensions in Europe started rising, a lot of companies in the civil aviation sector had diversified into defence, Stone tells GTR.
“And this then started to bring up a few problems, where companies’ turnover in defence was higher than it had previously been, and we found that they were then getting closed out of some finance opportunities.”
The issue prompted ADS and banking industry group UK Finance to issue guidance to UK defence companies last year on how best to respond to banks’ onboarding and compliance processes.
Meanwhile, ASD-Europe, the umbrella organisation for European defence industry associations, is also seeking a shift in EU policy to encourage lending and investment in defence.
Last year, the European Investment Bank (EIB) changed its stance to allow lending to companies producing dual-use goods – those with both civilian and military purposes. But goods designed solely for defence are still excluded, prompting 19 EU member states in January to ditch its ban on funding military products such as ammunition and weapons.
ASD-Europe’s communications manager Benedikt Weingärtner tells GTR the policy shift “will be helpful for defence in terms of projects, but it also would send out an important signal to the entire financial market”.
The EIB itself says demand for the €6bn capacity it has for defence and security is “picking up” and that there is increasing appetite among commercial lenders.
“European banks are moving, British banks are moving,” EIB vice-president Robert de Groot told a European Defence Agency conference in January. “There’s increasing interest… they may need a little bit more time, but clearly they are eager” to discuss what more they can do, he said.
Financing bottlenecks at a time when defence procurement is spiking has reignited discussions about a multilateral defence bank, possibly serving European or Nato countries.
A detailed proposal published in late 2024 by the Atlantic Council suggests that a Defence Resilience and Security Bank could cover the risk for commercial banks, “enabling them to extend financing to defence companies across the supply chain”.
The paper, authored by the think tank’s senior fellow Rob Murray, says that such an institution would play a role similar to national export-import banks, whose “mission and operations might not be aligned closely enough with the specific needs of defence procurement and leasing arrangement”.
Multilateral risk cover could also help trim borrowing costs. If all trade conducted between Nato allies in 2018/19 were conducted through such a bank, those countries could have saved almost US$500mn in annual interest payments, the paper suggests.
Chequered history
Banks, and even some ECAs, avoid financing or insuring defence exports because, unlike most goods exports, they can be used for lethal purposes. There is always a risk that even equipment intended for routine security can make its way to unintended recipients.
That reality has always made the sector a special case within export finance. The OECD Arrangement on export credits, which governs ECA activity for most wealthy nations, does not cover “exports of military equipment”, partly because that function is served by the special licensing regimes governments have in place for defence exports.
Therefore, ECAs are not required to apply the baseline transaction terms agreed by the Arrangement’s participants, nor do they have to conduct the exhaustive environmental and social impact assessments that most other projects that pose even mild ESG risks typically undergo.
This means that while the construction of an onshore wind farm or new stretch of highway in, say, Angola or Indonesia, would be pored over for years by consultants and subject to mitigation strategies and risk management plans, the export of armoured vehicles or fighter jets would not.
ECA representatives point out that the risks of a defence deal are considered when governments decide to issue export licences, which typically pay close attention to the human rights record of the destination country. But the approval process for the issuance of export licences is often influenced by political and commercial interests.
Even when exports are sent to a friendly nation, there is also no guarantee that geopolitical stability will endure over the decades-long lifespan of a tank or fighter jet. A revolution, regime change, or merely an unexpected election result, can turn human rights considerations on their head and shift alliances.
As an example, in the 1970s, UKEF covered the export of surface-to-air missiles to Iran. But just a few years later, the western-backed Shah was ousted by Islamic revolutionaries, putting British-made missiles in the hands of a government that has had hostile relations with the west ever since.
The repercussions of that deal lingered for decades. It wasn’t until 2023 that a dispute over the deal between UKEF and the exporter, a predecessor company to BAE Systems, was finally settled.
Banks also fear the reputational damage if they are revealed to have financed the shipment of weapons to a country that then uses them in a controversial conflict or even against their own people, as recent debates over wars in places like Gaza, Yemen and Myanmar have shown.
Even HSBC’s highly restrictive policy on defence financing has not made it immune to criticism. The bank has faced protests for holding shares in weapons manufacturers such as BAE Systems.
Historically, some major defence export contracts have been plagued by corruption. Deals are often shrouded in secrecy, highly competitive and involve vast sums of money, creating ideal conditions for bribery and misconduct.
In 2010, BAE Systems pleaded guilty to US charges of failing to comply with the Foreign Corrupt Practices Act and paid a US$400mn fine. In 2020, Airbus agreed to pay US$3.9bn in penalties to settle foreign bribery charges laid by France, the UK and US over both civilian and military exports to countries such as Indonesia and Ghana.
The historical precedents highlight why some banks and ECAs have tip-toed around the sector.
But as defence rockets up the agenda in Europe, there are risks that look set to take a back seat as the continent reckons with challenges to the east and west.
“Europe has to do more. Europe must bring more to the table,” European Commission president Ursula von der Leyen told the Munich security conference in February. “And to achieve this, we need a surge in European defence spending… we need a bold approach.”
