Government Lending 2.0: Putting a Price on Policy Risk

But greater scale does not solve the harder question: Which risks are worth taking with taxpayer exposure? The projects that policymakers view as most urgent are often the hardest to finance—projects with long timelines, uncertain revenues, and execution risk.

The government’s problem is not only funding or political will, but also a coordination failure rooted in the absence of a consistent framework for comparing financial risk against policy value. As strategic lending moves from announcement to execution, agencies need a clearer way to price risk, allocate it across government, and explain why some risky projects merit public support while others do not.

The Coordination Gap: No Shared Language for Risk

U.S. government lenders that finance domestic and overseas projects face a structural constraint. By design, they step in where private capital is reluctant to go: projects with upfront capital intensity, uncertain revenues, country exposure, and execution risk—the same features that make the projects strategically important.

Under the Federal Credit Reform Act (FCRA), agencies must budget for the expected unreimbursed cost of a direct loan or guarantee, based on projected cash flows, default risk, recoveries, fees, and other deal terms. This framework helps ensure discipline. But it only measures expected credit losses, not strategic value such as supply chain resilience, geopolitical influence, and development impact.

This creates an allocation problem. The policy benefits of a transaction may accrue across government, but the credit exposure, budget cost, and default scrutiny sit with the lending agency. And lender caution is not irrational: High-profile setbacks, such as Solyndra during the Obama administration and EXIM loans to Enron-led projects in the 1990s, have reinforced scrutiny around public support for complex strategic projects.

Consider an illustrative $100 million U.S.-backed loan to a rare earths project in Namibia. A policy office may value the project because it diversifies supply away from China and supports a partner country’s development. A lending program, meanwhile, will see a greenfield asset with execution risk, limited offtake, volatile commodity exposure, and residual sovereign or permitting risk—factors that reduce confidence in repayment and increase expected risks to taxpayer funds.

Neither perspective is wrong. And without a common risk-pricing vocabulary, agencies end up talking past one another: Policy offices emphasize strategic impact, while lenders emphasize repayment risk. The result is that high-impact projects may be delayed or dropped because the government lacks a disciplined way to compare policy value against credit risk. It also leaves agencies without a clear public rationale for how taxpayer exposure is being allocated across increasingly risky strategic projects, heightening the risk of public backlash if one fails.

So even as federal credit expands, the underlying allocation problem remains: How to direct scarce public risk capacity toward strategically important projects in a disciplined, transparent, and repeatable way.

A Market-Informed Fix: Putting a Price Tag on Risk

The underlying credit risks that make strategic sectors unattractive to private capital are real, and in many cases the right long-term fix involves macro policy adjustments—offtake guarantees, concessional capital structures, or the kind of de-risking architecture that multilateral development banks are positioned to provide. This paper is not about those solutions. It is about something narrower and more immediate: Policy offices that emphasize impact and lending agencies that talk credit risk will continue to talk past each other until they have a consistent framework for comparing financial risk against policy value.

One near-term component of such a framework is available without new legislation. Used carefully, market-informed risk metrics such as credit default swaps (CDS) can complement existing underwriting, development impact, and national security analysis, making strategic lending more disciplined, defensible, and effective.

A CDS is a financial instrument that pays the buyer if a borrower defaults on a loan, transferring default risk in exchange for a periodic premium, or spread. Where a liquid market exists, that spread gives a market-implied price for insuring against default: Widening spreads suggest rising risk, while tightening spreads suggest improving credit conditions. Applied to strategic lending, CDS pricing can do something that interagency memos often cannot: translate qualitative risk judgments into a concrete, dollar-denominated figure that policy agencies and lenders can evaluate together. In this way, market-based reference points could help agencies express risk in common units and ask whether the policy benefit is worth the implied cost.

To be clear, CDS are not a magic answer to interagency disagreements. In many strategic sectors, such as junior mining and emerging market infrastructure, there will be no liquid single-name CDS market. Thin trading, liquidity stress, or speculative activity can also distort spreads, creating the risk of misleading market signals. But a CDS is a useful example to demonstrate how explicit, market-informed risk pricing could lead to smarter interagency coordination around risk between lenders and policy agencies.

Return to the hypothetical Namibia example: If the market-implied CDS spread on the loan is 500 basis points (5 percent annually), the cost of insuring against default is approximately $5 million per year. That figure becomes a policy question: Is securing non-Chinese rare earth supply from Namibia worth an additional $5 million a year? That is a conversation that policy offices can engage in. It also forces genuine prioritization.

In some cases, an agency championing the policy objective could use appropriated funds, consistent with its authorities, to cover part of the incremental risk cost, purchase insurance, support a guarantee, or otherwise contribute to the transaction’s credit subsidy. Requiring the policy sponsor to put budget resources behind its judgment gives it skin in the game and shifts the conversation from advocacy to co-investment.

What Implementation Looks Like

Implementation should be practical and use existing oversight mechanisms. Policy agencies should add a short risk-pricing annex to interagency memos that identifies country, sector, and project risks; shows which risks are mitigated through insurance, guarantees, offtake, collateral, or other tools; estimates the residual exposure using market signals where available; and makes clear which agency is bearing or funding that exposure. And these risk-pricing annexes should be reviewed by the Office of Management and Budget (OMB) before any agency action to ensure compliance with FCRA and the appropriate OMB Circulars.

The point is not to turn policy agencies into hedge funds, but to give the government a shared, transparent way to compare risk cost against policy value before taxpayer capital is committed.

Adam Frost is a senior associate (non-resident) in the Economic Security and Technology Department at the Center for Strategic and International Studies in Washington, D.C. Jack Whitney is a former intern in the Economic Security and Technology Department at CSIS.