Credit guarantee is a goldmine for corporations

Housing corporations can borrow money with the safeguard of a guarantee system. This means cheaper borrowing and the guarantee of available capital. Members of the Dutch House of Representatives are pressing for this system to be reformed, as it is thought to encourage misconduct. However, research has shown that the advantages probably outweigh the disadvantages.

The study, which was conducted by Jacob Veenstra (Centre for Research on Local Government Economics) and Bernard van Ommeren (BNG Bank), was recently published in the journal ESB. Both authors are PhD students at the University of Groningen.

Guarantee allows lower interest rates

Housing corporations can take out guaranteed loans in order to perform their public duties. This means that if they are unable to meet their interest or repayment obligations, they will receive financial support. Banks know that they will get their money back and thus charge lower interest rates, meaning the housing corporations make substantial savings.

Guarantees and misconduct

If you know that someone will step in and help if everything goes wrong, you will be more willing to take a risk. If the risks work out, you make a handsome profit; if they don’t, the collective shares the damage. This is why guarantees are thought to lead to irresponsible behaviour and ultimately become unaffordable. Many countries have already discontinued such guarantees for precisely this reason. However, the corporations’ guarantee system is still working and a similar system of guarantees for municipalities (”Article 12”) has also proved tenable.

The interest benefits

Not all loans made to corporations are guaranteed. Loans for non-public duties or loans issued for less than 2 years are not covered by the guarantee system. This makes it possible to compare the interest rates for loans with and without a guarantee. A study of loans granted to corporations by BNG Bank shows that the interest on guaranteed loans is 0.8 of a percentage point lower than the interest charged for unguaranteed loans. This means that the guarantees granted to the social housing sector generate an annual interest benefit of approximately € 700 million.

The cost of guarantees

However, certain costs must be offset against these benefits. Between 1990 and 2012, for example, twenty corporations were saved at a cost of € 1.3 billion. When adjusted to inflation, this comes down to some € 70 million per year. So the support costs are considerably lower than the interest benefits. But the guarantee system also generates indirect, immeasurable costs. After all, misconduct does not necessarily lead to non-payment. It’s possible that some of the interest benefits are wasted on inefficient practices. Whatever else, the information above clearly shows that any extra costs would have to be exceedingly high (€ 630 million per year) to make the total costs cancel out the interest benefits of the guarantee system.

Discontinuing the system would be expensive

So the guarantee system is a valuable asset for the corporations. If they can manage to keep the system going, it would be both unwise and expensive to discontinue it.

Guarantee system

The guarantee system consists of three layers. First of all, it offers support with debt management. This used to be a job for the Central Fund for Social Housing (CFV), until debt management was taken over by the Social Housing Guarantee Fund (WSW) on 1 July 2015. The support is paid for by a debt management levy charged to the other corporations. This is how Vestia was recently saved. Although this support has always been enough until now, should it not be, the bank can make a claim on the guarantee capital of the WSW. The WSW has reserves and can order corporations to add to these reserves. But even if the WSW and the corporations fail to raise the amount needed, the government (national and local) will come to their aid.

More information

Jacob Veenstra, tel. +31 (0)50 363 2417 or +31 (0)6 17577315, e-mail jacob.veenstra@rug.nl or Bernard van Ommeren tel. +31 (0)6 43368463, e-mail vanommeren@bngadvies.nl.

Veenstra, J., Van Ommeren, B.J.F. 2015.Credit guarantee is a goldmine for corporations (Kredietgarantie voor corporaties is goud waard). ESB, 100 (4715), 450-453.