State-financed guarantee funds have a well-deserved bad name among economists. For decades they were hallowed by governments the world over as necessary to overcome credit market imperfections. But results have been bad and most of the time state-financed guarantees have led to massive waste of resources and non-performing loans. This paper, however, studies a seemingly successful guarantee program, Chile’s Fogape. The default rate of firms backed by public guarantees is very small and not higher than those of comparable firms, the fund seems to be sustainable and there is evidence suggesting that guarantees have increased access to credit. What explains this apparent success?

The standard policy argument in favor of guarantees is that they correct market failures which exclude creditworthy firms from the credit market. These can be classified in four groups1. First, they can overcome collateral constraints and compensate for low profit margins, thus increasing access to credit (also called additionality). Second, they offset the risks of lending to small and microborrowers. Third, they address information constraints. Last, they improve the productive efficiency of borrowers and induce learning.