Credit Guarantees-Session III

Alain Ize

What justifies public guarantees: Stiglitz-Weiss or Arrow-Lind?

Externalities(Public lending benefits > private lending benefits)

=> SUBSIDIZED

Risk aversion(Public cost of capital < private cost of capital)

=> UNSUBSIDIZED

Permanent(Helping finance

known borrowers)

Lowering expected risk of priority lending

Lowering unexpected risk of lending

(and lowering cost of capital => regulatory

arbitrage?)

Transient(Helping connect new borrowers or promote

new markets)

Overcoming first entrant disadvantage

(sorting out good from bad borrowers)

Overcoming fear of the unknown

(launching a new market)

Playing safe or making a difference?Which risk to target?

Political

Benefits

Economic Benefits

Low risk

borrower

High (low cost and high

leverage)

Low? (high financing

substitutability?)

High risk

borrower

Very low(politically

unsustainable?)

Low(too much chaff with

the wheat)

Marginal borrower

Low(high cost and not that

much to show for?)

High?(high additionality?)

Nigeria’s ACGF

• The scheme seems to be dysfunctional:– Heavily subsidized...– The forty percent loss rate undermines discipline?...– Yet, guarantees remain unpaid?Can it be salvaged through better design and

implementation?Or is it simply the wrong tool? (poor structural returns

cannot be addressed through guarantees)• The paper needs to go back to basics:

– Basic description of scheme’s design and history– Basic statistics (adjusted for inflation)– Basic cost-benefit analysis

Italy’s SGS

• Does the scheme make more political than economic sense?– Subsidy-light scheme (non actuarially adjusted premia)– But is there too much risk hedging?– Is the Italian SME sector large because it is well financed?...– Increasing orientation towards MGIs seems to make sense

• Well designed analysis but:– Is the control group really comparable? (profits)– Have the beneficiaries produced more economic value

(employment, growth, investment, etc.)?...– …or has the increased bank debt been simply offset by a

reduction in other forms of financing?

Chile’s FOGADE

• The scheme is clearly new wave:– Non-subsidized, risk-adjusted premia…– Auctions should further enhance efficiency

• Interesting analysis but some key issues unanswered:– Guarantees clearly matter in some sectors (more guarantees

induce more loans)…– …but how much, we do not really know...– The paper makes interesting points about the lack of correlation

between ex-post risk and guarantees…– …but there are other (perhaps more plausible) explanations:

• Unexpected risk does not show up (yet?...) in the data• Banks are unwilling to stick the expected risk to FOGADE (risk

adjusted premia + big brother superintendent watching)• Benefits of guarantees is regulatory and independent of risk (at least

in the non insurance intensive sectors)