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The US has been undertaking an irregular form of foreign aid, Sovereign Bond Guarantees, which entails guaranteeing some of the public debt of their allies, source here: https://www.cgdev.org/blog/whither-us-sovereign-bond-guarantee-program

The entire idea is that some states cannot access financing because they are not perceived as trustworthy, stable, or established enough. This creates a negative spiral, as high interest rates increase the probability of default. Guaranteeing the debt is bound to decrease the interest rate, making financing much easier and cheaper.

My question is: Has any other state done anything like this before? Who, when, where? Guarantees of private debt are common, but are there any other cases of state debt being guaranteed?

Is this an efficient form of foreign aid?

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  • $\begingroup$ Hi, welcome to economics.se. I edited your question, removing question where you were asking for opinions on the mater because as explicitly mentioned in our help center opinion based questions are considered off topic. $\endgroup$
    – 1muflon1
    May 25 at 22:31
  • $\begingroup$ In the United States following World War 2 debt guarantees, for student loans and other domestic programs, were a way to create off budget (off balance sheet) credit enhancements that did not contribute directly to the so-called national debt in the year(s) the loans were issued. However when defaults are paid in the programs the government would own the defaulted asset and use Treasury borrowing or taxes to make guaranteed payments. So the Sovereign Battery (Fed/Treasury system) enables Congress to insure (guarantee) cash flow to subsidized programs paid by increasing the float of Treasuries. $\endgroup$ May 26 at 1:44
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Has any other state done anything like this before? Who, when, where?

Yes, one (relatively) recent example from 2010 is EU member states guaranteeing portion of Greek debt see the Guardian article about it (although technically the countries are all in loose (con)federation).

Another example could be UK guaranteeing Irish land bonds in between 1920–1938 (see Foley-Fisher & McLaughlin 2016).

It is also commonly done by supranational organizations such as World Bank (of course World Bank is not a state but it gets its funds from donor states so you can view it as donor states running the program through the World Bank).

Is this an efficient form of foreign aid?

Well this is extremely broad question because efficiency could be examined from multiple angles, and as always an important question in public economics is compared to what?

The abovementioned research by Foley-Fisher & McLaughlin (2016) shows that such guarantees can reduce but not eliminate the risk premium. So they have a positive effect on reducing country's servicing costs. However, I am not aware of literature that would compare and contrast efficacy of this foreign aid program relative to some other programs that might perhaps use the same resources more efficiently. This being said debt guarantee is likely to be much less costly for donor country, so it would not be unreasonable to conjecture that it could be part of efficient foreign aid policy mix.

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