An exporter in Denver sold goods to a distributor in Brazil (and many other countries). After a long and satisfactory relationship with their Brazilian distributor, they agreed on payment terms of 150 days on an accepted draft basis.

After shipment, the exporter's bank sent the documents to a bank in Brazil with instructions to release the documents after the buyer accepted the 150-day draft thereby obligating themselves to pay it at maturity. Some traders refer to this method of payment as a documentary collection with a time draft, sometimes as Documents Against Acceptance, abbreviated DAA or D/A.

For years this relationship worked well and the distributor always met their obligations.

In October of 1989, the exporter shipped goods valued at $76,000. The distributor in Brazil accepted the draft with the maturity date falling on a Monday in March of 1990. On the Friday preceding the maturity date, the government of Brazil announced that at the end of business that day the old Cruzado would become invalid and a new currency, Cruzeiro, would be introduced on Monday.

On Monday, the due date, the distributor authorized their bank to pay $76,000. The bank informed them they could not transfer the funds until the central bank set a new rate of exchange for the new currency and implemented new regulations relative to wire transfers.

Days and weeks elapsed before they implemented the new regulations. The distributor then discovered that, according to the new regulations, they could only wire $1,200 a year out of the country. It doesn't take a calculator to figure out collection of the $76,000 would take some time!

This illustrates sovereign risk—the government intervened to prevent payment from being made. The distributor had the capacity and willingness to pay, but due to government controls, could not pay.

The exporter in Colorado informed the distributor that they would suspend future shipments until they received the $76,000. The distributor in Brazil, however, depended on receiving these goods for their livelihood. In order to keep their reputation clean, they arranged for payment from an account that they happened to have at a bank in Miami. Subsequently, payment terms for all future shipments were letter of credit only.

This lesson reminds us all that situations change, and not just with international customers or distributors, but with their countries as well. Exporters would be well served to regularly review the risks of doing business in all their markets.