Comments on
Promoting the International Use of
Emerging Country Currencies: the case of
Local Currency Debt Issuance for Latin
America and the Caribbean
by Andrew Powell
Victor Pontines, PhD
Research Fellow
Asian Development Bank Institute
Joint Conference: The BRICS & Asia, Currency
Internationalization, and International Monetary Reform
December 11, 2012
Key Messages of the Paper
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LAC currencies lack the capacity to borrow in their own
currencies -- international transactions mostly
denominated in currencies of a few advanced economies
LAC countries have made progress borrowing in
domestic currencies, though they still have a long way to
go
Volatility and risk of not meeting debt obligations can be
substantially reduced if LAC debts are issued in
domestic currencies
Multilateral development banks have a critical role to
play by cooperating & introducing innovative lending
schemes in the currencies of the borrowing countries.
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Importance and Relevance of the Paper
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Related to the literature on “original sin”
(Eichengreen and Hausmann, 2003)
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Painful memories of the past: limited holdings of foreign
currency assets and dependence on foreign currency debt
made currency depreciations contractionary (so-called
balance-sheet effect from currency mismatches)
One dimension in the debate relating to the
functioning of the IMS – internationalization of EM
currencies – opportunity for these countries to
access international financial markets ‘cheaply’ and
without incurring exchange rate risk
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Observed expansion in the local markets for
government bonds in LAC countries (1)
Source: Didier &
Schmukler 2011)
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Observed expansion in the local markets for
government bonds in LAC countries (2)
 Does this signal the beginning of redemption from
‘original sin’?
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According to Hausmann and Panizza (2010) – Not really
“This only represents that they have borrowed less abroad
not because they are borrowing less in foreign currency”.
However, “when countries are making greater use of the
domestic bond market because they managed to convince
foreign investors to participate in this market…they have
indeed achieved redemption.
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Attraction of LAC-issued domestic bonds
for foreign investors
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How important is this phenomenon for LAC
countries?
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One key story missing from the current-version of the
paper
Understandable as it is not easy to obtain data on the
overall level of foreign holdings of domestic bonds
One can resort to the series of surveys conducted by
the US Treasury on the composition of the bond
portfolio of US investors
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Attraction of LAC-issued domestic bonds
for foreign investors (2)
US Participation in Local Currency Bond Markets
(in Bil $)
2001
2008
2011
Emerging Europe
Latin America
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Venezuela
0.74
0.46
0.07
0.08
0.01
0.00
0.29
0.00
0.02
4.65
16.74
0.34
8.49
0.01
3.37
3.99
0.33
0.22
0.60
25.17
0.36
20.11
0.97
0.13
3.59
0.00
0.01
Asia
China
India
Indonesia
Malaysia
Pakistan
Philippines
Thailand
0.06
0.00
0.00
0.01
0.02
0.00
0.01
0.03
5.18
0.20
0.01
1.85
2.59
0.00
0.05
0.48
5.94
0.31
0.67
0.07
4.37
0.00
0.51
0.01
Source: Report on U.S. Portfolio Holdings of Foreign Securities (various years).
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Benefit of borrowing in domestic currencies
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Simulations shown in Table 4 provide a convincing case to
the value of issuing debt in domestic currencies – stable and
lower default risk
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Implication: Substantial diversification benefits if lending are
conducted in a portfolio of local currencies
Another way to arrive at this result is to examine the actual
performance of a portfolio of EM bonds before and during the
recent crisis
Source: Miyajima (2012).
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Benefit of borrowing in domestic currencies (2)
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Multilateral development banks (MDBs) can play a critical role
by promoting lending in domestic currency
According to the paper though, there is a need to surmount
the Catch 22 dilemma - MDB lending are concentrated in EM
countries that already have some degree of liquidity
Initiatives that attempt to surmount this dilemma deserve
serious consideration:
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The Currency Exchange (TCX) initiative - based on the
principle that a fund can retain the currency risks and
achieve significant overall risk reduction by pooling
currency risks across various regions
 Although of a modest size, it has the potential to have
significant impact on SMEs
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Thank You!
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