Publicly Guaranteed Debt

Publicly guaranteed debt is debt owed by a private borrower, or by a public enterprise that is not part of the government itself, whose repayment is guaranteed by a public entity such as the national government, a regional government or a state agency. In World Bank debt statistics it is one half of the category "public and publicly guaranteed" (PPG) debt: public debt is owed directly by public bodies, while publicly guaranteed debt is owed by others but backed by the state's promise to pay if they cannot.

The term matters because a guarantee turns a private obligation into a possible claim on taxpayers. It sits between public debt, which the state owes outright, and private nonguaranteed (PNG) debt, which the state has no legal duty to repay. The guarantee itself is usually given through a sovereign guarantee (SG), and the debt it backs is often part of a country's external debt, although guarantees on domestic loans also exist.

Think of a young person renting a first flat, with a parent who signs the lease as guarantor. The young person owes the rent and is expected to pay it. But if they stop paying, the landlord can go to the parent. The parent has not spent any money yet, yet they now carry a risk that may cost them later.

Publicly guaranteed debt is the same arrangement with the government in the parent's role. A power company, an airline or a private investor in a road borrows the money, and the government signs as guarantor. Lenders charge less because they trust the government, but if the borrower fails, the bill arrives at the national budget.

The World Bank's International Debt Statistics groups the long-term external debt of low- and middle-income countries by type of borrower:

• Public debt. External obligations of the national government, political subdivisions such as provinces, and autonomous public bodies, including the central bank where it borrows.
• Publicly guaranteed debt. External obligations of private debtors whose repayment is guaranteed by a public entity.
• Private nonguaranteed debt. External obligations of private debtors that no public entity guarantees.

Public and publicly guaranteed debt together form PPG debt, and many World Bank and IMF indicators, such as PPG debt service as a share of exports or of government revenue, are built on that combined figure. Short-term debt and use of IMF credit are added to the long-term categories to reach total external debt.

Governments guarantee debt to support projects and firms they consider important while keeping the borrowing off their own balance sheet. Typical cases include:

• State-owned enterprises. Utilities, airlines and railways often borrow with a government guarantee so that they can raise money more cheaply.
• Infrastructure and energy projects. Private developers in a public private partnership (PPP) or an independent power project may ask for a guarantee on the payments owed to them or on their loans.
• Export credit and development lending. Export credit agencies and development banks may require a guarantee before lending to a company in a developing country.
• Bank support in a crisis. During the 2008 financial crisis, several governments guaranteed new bonds issued by their banks to keep funding markets open.

Until a guarantee is called, it is a contingent liability: a possible future cost rather than an actual one. That makes guarantees attractive to governments facing borrowing limits, and it is also why they are risky. If many guaranteed borrowers fail at once, perhaps after a currency devaluation that raises the cost of foreign currency loans, the government must take on debt it had not planned for, which can push it toward sovereign default. Rating agencies and the IMF therefore look beyond direct government borrowing and ask governments to publish their stock of guarantees. Lenders price this credit risk partly on the guarantor's standing, so the credit spread on guaranteed debt tends to track the government's own.

Pakistan's Ministry of Finance reports government guarantees issued to public sector enterprises, mainly in energy and transport, as part of its debt reporting, and the State Bank of Pakistan's data on external debt and liabilities shows the external debt of public sector enterprises as a separate line within public debt. Guarantees given to power sector entities have been part of the long debate over circular debt in the energy chain. This domestic reporting sits alongside Pakistan's domestic debt, including permanent debt, floating debt and unfunded debt.

Under the IMF's public sector debt standards, guarantees are generally not recorded as debt of the guarantor until they are called, but they should be disclosed as a memorandum item. When a government pays on a guarantee, the payment becomes its own debt or spending. Good practice in debt management includes setting a ceiling on new guarantees, charging the borrower a guarantee fee that reflects the risk, and reporting the outstanding stock each year, so that taxpayers can see the full size of what the state has promised, not just the debt it has already taken on. Guarantees also connect with odious debt arguments when a guarantee was given by an earlier regime for loans that did not serve the public.

• World Bank International Debt Statistics
• External Debt Statistics: Guide for Compilers and Users