When a country can't access bond markets on its own, the World Bank has twice stepped in with a partial guarantee.
When a country can't access bond markets on its own, the World Bank has twice stepped in with a partial guarantee — which in both cases turned out to be worth less than the original bond buyers had bargained for.That form of financial engineering tempted bond investors into thinking private-sector bonds might have the same seniority afforded to World Bank debts.
In the first case, investors' hopes were dashed. The same thing looks possible in the second case, too.If a country with such a bond misses a debt payment, then the guarantee kicks in; the World Bank makes the coupon payment to the bondholders, and the country owes the Bank instead. Because the Bank is a preferred creditor, the country won't default on that obligation. And as soon as the Bank is repaid, the guarantee is reinstated, meaning that the next payment is covered, too.The first time the Bank attempted this structure, with an Argentina bond issued in 1999, the cleverness evaporated on its first exposure to reality.
, if bondholders get minimal benefit from a World Bank guarantee for the second consecutive time, that structure seems to belong solidly in the "tried and failed" category.If you want to explore the details of what happened to the Argentina bond, and if you can get past the Euromoney paywall,
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