A loan guarantee, in finance, is a promise by one party (the guarantor) to assume the debt obligation of a borrower if that borrower defaults.
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The term can be used to refer to a government to assume a private debt obligation if the borrower defaults. Most loan guarantee programs are established to correct perceived market failures by which small borrowers, regardless of creditworthiness, lack access to the credit resources available to large borrowers.[1]
Loan guarantees can also be extended to large borrowers for political reasons. For example, Chrysler Corporation, one of the "big three" US automobile manufacturers, obtained a loan guarantee in 1979 amid its near-collapse, and lobbying by labor interests. Somewhat differently, despite intensive lobbying by the Israel lobby, President George H. W. Bush, refused $10 billion in loan guarantees to the Israeli government of Itzhak Shamir, because of his pro-settlement policy, and because Palestinians and many Arab governments viewed the prior acceptance of loan guarantees as a test of America's credibility as mediator. Bush requested and received a Congressional delay in discussion of the guarantees, and the Madrid Conference of 1991 was later convened. These loan guarantees were issued later, following the election of Itzhak Rabin and his pledge to end Shamir's settlement policy and reformulate national priorities.[2]