Discussion of: “ PCGs–The Global Picture”

1. Discussion of:“PCGs–The Global Picture” Tito Cordella(LAC Chief Economist Office, World Bank) Workshop on“Partial Credit Guarantee Schemes – Experiences and LessonsWashington DC, March 13, 2008

2. What is the purpose of PCGs? • To improve access to credit to firms that are constrained (e.g., SMEs) because of: • Lack of collateral • Asymmetric information • High screening costs • And/or create positive externalities • To other sectors (through innovation) • Across time (infant industry argument) • To politicians

3. The appeal of PCGs • Allow to exploit informational advantages of the guarantor vis-à-vis the lender • Or their better contract enforcing ability/seniority • In the case of IFI • Allow diversification of risk • Transforming a portfolio of sub-prime loans in a AAA one • Exploit regulatory arbitrage • Provide subsidies in a market friendly way (at least in appearance) and/or conceal the true fiscal cost

4. Design issues • Who should carry out the credit appraisal? • The agent with the informational advantage • How large should the coverage be? • It depends on who has the informational advantage • Larger if the guarantor • Smaller if the lender (to preserve incentives) • How should the guarantee be priced? • Depends on the externalities • and of informational asymmetries • Extent of adverse selection/screening costs • Extent of moral hazard/monitoring costs (risk based pricing)

5. New Evidence • B-K-M provide new evidence through survey of PCGs around the world • The results of the questionnaire allow for informative descriptive statistics on some key PCGs design issues • But not on their effectiveness • Don’t get me wrong, this is a first important step! • That allows preliminary “tests” on the incentive compatibility of existing PCGs schemes

6. New Evidence • A surge of new PGC schemes in the last years • Publicly operated schemes are on average significantly younger than mutually operated schemes • Does this mean the PCGs are becoming increasing popular, and that publicly operated schemes are becoming the guarantee system of choice in new PCGs? • Or does this reflect a survival bias in the sample and the fact that publicly operated schemes are more likely to go bankrupt?

7. New Evidence • Governments have an important role in funding, the private sector in management risk assessment and recovery • Government funding is positively correlated with government management but not with government recovery or risk assessment • However, the results are not very clear as Manage_G and CrRisk_G are positively correlated with both Recovery_G and Recovery_P • Is this incentive compatible? Probably not as the median coverage of the guarantee is 80%!

8. New Evidence • Risk pricing is limited (bad) but there is a positive correlation between coverage ratios and pricing according to past performance (good) • PCGs that take on more ex-post risk have a better risk management (good) • Government involvement in risk assessment and recovery (but not in funding and management) is positively correlated with higher default • Puzzling result giving the high coverage ratio • But it might highlight different government objectives (connected lending)

9. Summing up… • I learnt a lot from these two interesting papers • The evidence on the “incentive compatibility” of existing PCGs is mixed but not very reassuring • Additional research is needed to understand under which circumstances PGCs can improve welfare • Design issues are crucial and might require some modeling effort • We need some testable implication to guide the empirical analysis • And a lot of effort to gather additional data to test our models!