A Model of Public Credit Guarantees

Abstract

Governments in many countries are often faced with the need to provide a guarantee support for the financing of infrastructure projects at the national and municipal levels. In the absence of government as a third party in the writing of debt contracts, two problems arise: One, credit is rationed by quantity, causing its equilibrium price to be higher than what comes from meeting supply and demand. Second, borrowers may not have negotiating power to exact the minimum possible cost of money. This paper shows a model for estimating a guarantee rate as a way to implement guarantee agreements.