Local market development critical to financial stability, EBRD’s Berglof says

By EBRD  Press Office

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The development of effective local capital markets is crucial to long-term financial stability, the EBRD’s Chief Economist Erik Berglof said on Thursday.

Under-developed local currency and capital markets and lack of domestic funding proved to be a major vulnerability in the global economic crisis and urgent steps were needed to redress the key economic imbalance, he added.

Mr Berglof was speaking after a conference in Astana, Kazakhstan, on the development of Local Currency Finance and Local Currency Markets, organised by the EBRD, the G-20 French Presidency and the Reinventing Bretton Woods Committee.

The conference, held on the sidelines of the EBRD Annual Meeting, brought together experts and senior policy-makers to discuss responses to the challenge of excessive foreign currency borrowing that were very costly to economies during the global financial crisis.

It looked at the concrete root causes and consequences of excessive foreign exchange borrowing, examined case studies on how countries such as Turkey, Russia and Poland had managed to reduce dependence on foreign currency, as well as the practical implications of the development of local currency markets and how cross-border credits can be made less risky.

In his opening remarks to the conference, the EBRD President’s Thomas Mirow said countries whose private and public debt was denominated in domestic currency were far less susceptible to external shocks than countries that were highly “dollarised” or “euroised”.

He added: “International financial integration is good, but its risks must be mitigated by what one might call ‘local financial content’: local currency, local deposit bases and local capital markets.”

Summing up the conclusions of the conference, Benoît Coeuré, Deputy Director-General and Chief Economist at the French finance ministry, said the meeting had been especially fruitful as the discussion had been based on real evidence and practical experience.

The conference had underlined a need for a multi-faceted and multi-dimensional approach to the development of local currency markets and that reforms had to be put in place with the help of the international community but this was a process that had to be owned locally and market driven.

Mr Coeuré stressed the importance of attracting both local and international investors to local currency markets using different tools. Also key was the fact that regulatory changes had to be designed in such a way that they would not discourage long-term investment.

In a direct response to problems that arose during the global economic crisis, the EBRD launched its Local Currency and Local Capital Market Initiative at the EBRD’s May 2010 Annual Meeting in Zagreb, Croatia (related press release). The project aims to address the root causes of the high use of foreign currency in domestic financial systems and to develop local capital markets jointly with other IFIs such the IMF and the World Bank.

Under the programme, the EBRD together with other international organisations is looking at individual economies’ countries to determine country-specific causes of high dependence on foreign currency borrowing and also seeking country-specific responses when developing local currency and capital markets.

The first concrete output from this effort – joint country assessments of local currency and local capital markets in Georgia, Kazakhstan and Ukraine – will be presented during the Astana Annual Meeting.

The assessments will outline the appropriate role of the international financial institutions and of authorities in the development of local currency and capital markets. Further similar assessments are planned.

In linked developments, a special EBRD programme was launched in February this year, targeting the development of local capital markets in the less-advanced countries of the Caucasus and Central Asia.

One month later, the European Bank Coordination “Vienna” Initiative (122KB - PDF) published the conclusions of its private-public sector working group on Local Currency and Capital Markets calling on banks to discontinue particularly risky forms of foreign exchange lending.

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