The buyer holds a local bank's promise. Your bank stands behind it.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
A counter-guarantee is how an exporter's bank provides a guarantee in a country where the beneficiary will only accept one from a bank it knows. The beneficiary holds a guarantee issued in its own country, often under its own law, by a local bank. That bank holds a counter-guarantee from the exporter's bank, and the exporter's bank holds its customer's counter-indemnity. A call runs down the chain in days, each bank paying on a complying demand and then claiming from the one behind it. For the exporter's bank the credit is the same as a direct guarantee; what it loses is control of the document the beneficiary actually holds.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
Issue 02 — Aoraki Trade Exports. Paid in USD, costs in NZD, asking for a NZ$6m multi-currency facility. The MD won't say which currencies. Your call first, then the senior banker's.
A government agency or state-owned buyer abroad may be unwilling, unable or not permitted to accept a guarantee from a foreign bank. It wants to claim in its own language, from a bank it can visit, under a law its courts apply. Some procurement rules require exactly that; others, such as the World Bank's for the projects it finances, let bidders submit guarantees issued directly by a bank in any eligible country, though a performance security from abroad that cannot be enforced in the borrower's country needs a correspondent there. Where a local guarantee is required, the exporter's bank cannot issue it itself, so it asks a correspondent in the buyer's country to issue one and stands behind that bank with a counter-guarantee.
The alternative is a direct guarantee: the exporter's bank issues to the beneficiary itself, perhaps sending it through a local bank that only advises it and adds no promise of its own. A direct guarantee keeps the text and the governing law in the exporter's bank's hands. An indirect one, built on a counter-guarantee, gives the beneficiary what it asked for at the cost of a second bank, a second fee and a second set of terms.
Each link is independent of the others. Under the ICC's Uniform Rules for Demand Guarantees (URDG 758), a counter-guarantee is independent of the guarantee it supports and of the contract behind both. Where a guarantee is issued subject to URDG at a counter-guarantor's request, the counter-guarantee is subject to the rules too, unless it excludes them. A demand on the counter-guarantee must carry the local bank's statement that it has received a complying demand under its own guarantee, unless the counter-guarantee expressly excludes that requirement; the exporter's bank has five business days to examine the demand it receives.
The rules also govern the extend-or-pay demand. If the beneficiary asks for the expiry to be extended or the guarantee paid, the local bank may suspend payment for up to 30 days, and the exporter's bank for up to four calendar days less than the local bank's suspension, while the exporter decides. Under the rules, unless the guarantee says otherwise, the local guarantee is governed by the law where the local bank issued it, and the counter-guarantee by the law where the exporter's bank issued it: one chain, two laws.
An irrigation equipment maker, constructed for this page, wins a US$5.6m contract to supply and commission centre pivots for a state agricultural agency in a country whose rules accept only guarantees from locally licensed banks. The contract requires an advance payment guarantee of 15% and a performance guarantee of 7.5%. The exporter's bank issues two counter-guarantees to its correspondent there, each expiring 30 days after the local guarantee it supports, and the correspondent issues the local guarantees in the agency's own form. The percentages and periods are the example's.
Commissioning slips when a shipment is held at the port. Two weeks before the performance guarantee expires, the agency presents an extend-or-pay demand to the local bank, which suspends payment and passes the request down the chain with its own demand. The exporter agrees to a six-month extension, and both guarantees are extended: the local one by the correspondent, the counter-guarantee by the exporter's bank, which approves six more months of exposure to a project that is now late. With the extension granted, the agency's demand counts as withdrawn. Had none been granted, no further demand would have been needed: the exporter's bank, whose suspension ends at least four days before the local bank's, would have paid the correspondent's demand for US$420,000 and debited its customer, and the correspondent would then have paid the agency.
The credit risk is the customer's, as with any guarantee. The additions are in the chain. The first is the text: the beneficiary's form, written under local law, may differ from the counter-guarantee, and the exporter's bank pays on the local bank's statement, not on its own reading of the local demand. The second is time. A counter-guarantee is commonly given a buffer beyond the local guarantee's expiry, so that a demand made on the last day can still be passed down; in some countries local law or the beneficiary's practice can keep a guarantee claimable after its stated expiry, and a correspondent there may ask for a counter-guarantee with no fixed end. Under URDG 758, a counter-guarantee that states no expiry ends 30 calendar days after the guarantee does.
The third is the correspondent itself. It takes credit risk on the exporter's bank and charges for it, and its willingness to issue depends on that line and on the country's sanctions and conduct rules. Where the exporter cannot give enough security, an export credit agency can share the exposure: UK Export Finance and Export Finance Australia both guarantee banks issuing contract bonds for exporters.
DEFINED IN ONE PARAGRAPH → · THE ON-DEMAND GUARANTEE → · ADVANCE PAYMENT GUARANTEE →
A credit officer approves the line as a direct guarantee of the same amount, then reads what the chain adds. Has the beneficiary's form been seen and agreed, or will the correspondent issue whatever the agency asks for? Is the counter-guarantee's expiry fixed, and is the buffer long enough to receive a late demand? Is the counter-guarantee subject to URDG, and if the local guarantee is not, what does local law say about expiry and about calls? The answers decide whether the exposure ends when the contract does, or some time after.
For the exporter, the counter-guarantee is the price of selling to a buyer that sets the terms. Its cost is two fees rather than one, and its risk is that a call can be paid in the buyer's country before the exporter's own bank has a say. The negotiation that matters happens in the contract: when the agency may call, and what documents it must produce.
PRODUCT FILE: BANK GUARANTEE → · BANK GUARANTEE VS LETTER OF CREDIT → · HOW BANKS READ EXPORTERS →
The documents the statements on this page rest on. Each was opened and checked when cited.
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