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FOGAPE: an economic analysis


The apparent success of Fogape does not warrant a blank endorsement of state-financed guarantee programs.

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The apparent success of Fogape does not warrant a blank endorsement of state-financed guarantee programs. It should be stressed that its apparent success does not stem from any superior ability to overcome the standard problems created by asymmetric information in credit markets, nor because it provides advice to borrowers-in fact, Fogape neither evaluates borrowers, nor monitors the lending practices of banks. On the contrary, Fogape works because the incentive structure prompts banks to evaluate borrowers as if they were bearing the cost of making bad loans, by excluding them 16 from future auctions if the default rate rises too much. Nevertheless, there are several indications that substitution of public for private guarantees may be important. To conclude we will make some suggestions to improve Fogape and, more generally, indicate which indicators should be used to evaluate the performance of a publicly-funded guarantee fund.

As we have seen in the analysis, there is an important distinction to be made between the individual coverage rate, which should be large, and the total amount guaranteed by the fund, which should be small. In addition, bank profits increase with the coverage rate. Thus, while the provisions that limit the share of individual banks in total rights make sense, it would probably be better to fix a high individual coverage rate and auction guarantee rights to the highest bidder. By doing so Fogape would prevent subtitution and, at the same time, extract rents from banks. How should one evaluate a fund like Fogape? One indicator of the funds success is a default rate which should similar to that for loans to similar firms but who are able to post private collateral. Second, it is not enough to show some additionality-one should measure the extent of susbstitution. Last, one should also evaluate the terms of finance that banks offer to guaranteed firms. As said before, it is unlikely that the borrowers outside option is improved by the guarantee and, as it stands, probably most of the rent accrues to the bank.
José MIguel Benavente, Alexander Galetovic, Ricardo Sanhueza