A Guide to Guarantees for Sovereign Debtors
This report examines how sovereign guarantees can be best deployed to support sustainable development outcomes in emerging markets and developing countries, distinguishing between guarantees used to support public budgets and those used to leverage investments in specific projects.
Key Findings
-
Guarantees supporting sovereign financing and those supporting specific investments are fundamentally different instruments and should be assessed differently from a guarantee taker's perspective.
-
Budget financing guarantees can improve financing conditions but do not reduce underlying fiscal vulnerabilities, while project-based guarantees can address specific market failures and mobilize private capital.
-
Guarantees cannot substitute for sound macroeconomic management or resolve underlying solvency challenges; depending on how risks are allocated, they can alleviate or exacerbate fiscal vulnerabilities.
-
Guarantees are most effective when they address genuine market failures, generate measurable development benefits, and remain consistent with fiscal sustainability.
Guarantees are widely used in development finance as instruments to mitigate risk, lower the cost of capital, and crowd in private investors. By transferring political and credit risks from sovereign borrowers to more highly rated guarantors, they seek to enhance creditworthiness and expand access to financing, particularly in capital-intensive sectors such as energy and infrastructure.
This report examines how different types of guarantees can be deployed more effectively to finance development priorities, with a focus on sustainable energy systems and water ecosystem protection. Drawing on three country case studies—Argentina, El Salvador, and India—it examines the conditions under which guarantees allocate risks and contribute to development outcomes, as well as the macro-fiscal conditions under which they do so. The analysis is complemented by insights from expert interviews.
The report focuses on a key distinction between guarantees used to fund public budgets and those used to leverage investment in specific projects. Guarantees supporting sovereign financing are primarily intended to strengthen the state's overall financing position by improving market access, reducing borrowing costs, or extending maturities. Project-level guarantees, by contrast, are designed to improve investment viability, lower financing costs, and create public goods, while potentially generating contingent liabilities for the state.
The case studies illustrate these dynamics in different contexts. Argentina demonstrates the potential of guarantees to support renewable energy market creation; El Salvador demonstrates their use in linking financing improvements to environmental objectives; and India highlights their catalytic role in developing new financing markets.
Ultimately, guarantees are best understood as targeted risk-sharing instruments whose effectiveness depends on sound pricing, transparent governance, and alignment with broader development, climate, and macroeconomic objectives. The central policy challenge is not how to maximize guarantee volumes, but how to allocate guarantees to contexts where they address genuine market failures, generate measurable development benefits, and remain consistent with fiscal sustainability.
You might also be interested in
Financing the Energy Transition: Lower capital costs matter
The global energy transition requires low-interest financing options, debt relief, and an expansion of multilateral lending.
Scaling Rural Distributed Renewable Energy in India
A practical framework to help states and distribution companies plan and scale grid-connected distributed renewable energy in rural India that supports India’s clean energy goals.
Solar Can Outcompete Grid Power in Rural India With the Right Planning
New research finds solar-based distributed renewable energy systems can generate electricity in rural India at a lower cost than conventional grid supply. Careful planning of local demand, storage, grid conditions, financing, and long-term operations is key to unlock these savings.
India’s State Energy Firms can Boost Energy Security by Progressively Shifting Over INR 2 Trillion Per Year From Fossil Fuels to Clean Energy
New research finds India’s nine state-owned energy companies could progressively redirect a significant share of their over INR 2 trillion annual capital expenditure toward clean and reliable energy, strengthening energy security while accelerating the low-carbon transition.