Saturday, March 15, 2008

World Bank & Local Bonds

SOURCES: Financial Times

The World Bank has recently cracked down on a problem in global emerging markets by building local currency bond markets to permit countries to finance long-term needs. The World Bank planned a $5 billion fund in the first public/private initiative. Rising economies pull additional investments through local currency bond markets. If countries borrow in their own currency, then this would remove the risk of dollar-denominated debt. The International Bank for Reconstruction and Development and the International Finance Corporation will be sponsored by investments sough by the fund manager. Currently, there is no designated fund manager, but should be chosen by next month.

Once elected, the fund manager will seek investments from private institutional investors, sovereign wealth funds, and central banks. The World Banks anticipates the fund manager to raise approximately $5 billion by next year. More recently, central banks and other investors hope to branch out away from dollar-denominated debt. In addition, sovereign wealth funds have risen as a new resource of liquidity. World Bank employees believe the fund has potential because of all emerging market debt, approximate 70 percent in local currencies.

However, only 10 percent of the $200 billion in market assets managed by fund managers is devoted to local currency debt. The goal of the World Bank is to change local bond markets into a mainstream asset class, according to Oliver Fratzscher, senior financial economist in the World Bank’s capital markets department. In the past five years, private sector upcoming market local currency bond funds have multiplied.

However, the bonds alone did not come from investor interest; instead, it went to derivative instruments. The World Bank believes that this approach may lead to a short-term investor perspective and may cut short the liquidity in the local currency bond markets.

Will the money put into strengthening local currency bonds gain only a short-term response from investors? Will the World Bank’s focus on local currency bonds alone be enough to help countries finance long-term needs?

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