The paper is structured in four sections. Section 2 presents a brief literature review. Section 3 describes the methodology used in the three surveys that provided the basis for this work. Section 4 is an overview of the PCGs operating in LAC and their characteristics, differentiating between pre- and post-pandemic periods, and presenting the main challenges faced by PCGs in the latter. Section 5 concludes with a discussion of the main lessons and conclusions.

# 2. Literature Review

SMEs are usually credit constrained, particularly during periods of economic turbulence. Existing literature points to market failures associated with information asymmetries between the credit providers and the firms as the underlying driver for SMEs’ access to credit (Cusmano, 2013; Mullins and Toro, 2018). In the presence of asymmetric information banks face difficulties distinguishing creditworthy borrowers, and may opt to credit ration or even deny credit to entire market segments. The sole reliance on pricing could lead to problems of adverse selection (Stiglitz and Weiss, 1981). SMEs' inherent characteristics, such as limited credit history and incomplete financial information and limited collateral, restrict their ability to access finance. As the SME lending, in the initial stages, is largely based on collateral availability, banks remain reluctant to actively participate in this market. In addition, due to fixed loan origination costs, SME lending is relatively costly for banks compared with more sizable loans. Given SMEs’ complexities, scoring systems are less frequently used as in the case of household lending. Furthermore, smaller enterprises are prone to lose access to credit in periods of large market swings. DeYoung et al. (2015) provide evidence of changes in banks’ lending behavior during the 2008 Global Financial Crisis (GFC), where they become less tolerant to risk and rationed supply of credit to SMEs.

PCGs are a widely used risk mitigation tool to support SME financing. PCGs reduce the need for SMEs to post collateral for accessing to credit, as these schemes pay the lender a portion of the loan in the case of default. According to Beck et al. (2008a), 50 percent of developed countries’ banks and 55 percent from developing countries consider PCGs are the most influential government program to support bank financing to SMEs (compared programs include interest subsidies, directed credit programs, and regulatory subsidies). During the GFC, public guarantee schemes played a central role in countering the effects of the recession by enhancing credit allocation to SMEs. Back then, PCGs substantially expanded both in terms of operating schemes and guarantee volumes. For instance, OECD countries saw a threefold increase in the share of guaranteed loans in the total loans stock between 2008 and 2010 (see Cusmano, 2013 and OECD, 2020).

Some studies have empirically assessed the performance of PCGs. In the case of Chile, Mullins and Toro (2018) find that by accessing to new credit via PCGs, SMEs significantly scale up their sales, employment, and input purchases. The authors also find that SMEs increase borrowing from other banks following a loan guarantee. For the United States, Hancock et al (2007) show evidence of stabilizing effects of the SBA-guaranteed loan program on SME outcomes, as this program’s loans were less pro-cyclical and less affected by bank capital than non-guaranteed loans. Additionally, Craig et al. (2008) find a positive and significant correlation between the average level of employment in a local market and the level of SBA guaranteed lending in that local market, with the intensity of this correlation being relatively larger in low3