The State Guarantees to Cover Bank Debt

In the case of a government guarantee to cover bank debt, if the bank’s reference obligation — for example, a bank bond — experiences a default event before the maturity date of the contract, the State (guarantor) makes a default payment to the bondholders to cover the loss. The bank (borrower) pays the guarantor a periodic fee for the insurance. After the default of the reference entity, the fee payments stop. The guarantee fee is usually calculated on the basis of a rule defined by the law, or on a contractual basis, and expressed in the form of an annualised percentage of the notional value of the bank’s reference obligation. In particular, the European Commission has set out the pricing formula for the minimum remuneration level of these State guarantees.