What are Guarantees?

What are Guarantees?

Similar to collateral, guarantees are used to minimise the credit risk. In this, a third party is involved which gives an assurance of fulfilling the contractual requirements, if the required party failed to fulfil that. It is usually referred to as a financial guarantee which means that the party giving the promise will have to make a financial payment to fulfil the contractual requirements.

Examples

It is widely used in Central Governments giving guarantees to public sector entities. As governments are at the highest level of credit rating, this uplifts the financial contract significantly and reduces the credit risk of the public sector entity significantly.