.. in the foreign currency value of its revenues. In addition to the potential capital losses that a government may incur on its debt portfolio, its ability to access international markets to refinance its maturing debt is likely to be hindered. Taking the above mentioned issues into consideration it will be advantageous for the lender as well as the borrower, which often is a sovereign nation to be knowledgeable on the risks involved, and commitment by parties in order to understand their obligations, since both could end up as losers.On the other hand the O.E.C.D also believes that risks associated with a large net currency exposure and the existence of deep and liquid domestic capital markets are the main reasons why the governments of most industrial countries have limited their issuance of foreign currency debt. These Governments have established well-documented legal clauses in their contracts. Such clauses are supported by policies enacted by the lawmakers of the land.
According to the IMFs Monetary and Exchange Affairs Department, large advanced economies such as, Germany, Japan, and the United States do not issue foreign currency debt, while France and the United Kingdom issue only a small fraction of their debt in ecus. In Canada, foreign currency debt represents about 3 percent of total public debt (reflecting debt accumulated in the past and debt issues to finance foreign exchange reserves), and the budget deficit is funded entirely in domestic currency. In recent years, a number of small advanced economies, including Belgium, Denmark, and New Zealand, have stopped issuing foreign currency debt, except to replenish their foreign currency reserves. In Ireland, gross foreign currency borrowing is limited to the level of maturing foreign currency debt. Spain and Sweden issue foreign currency debt but hedge their currency risk through swaps or swap options.
In developing countries, however, governments often need to access international debt markets to offset a shortage of local savings, lengthen the maturity of their debt, diversify their interest rate risk exposure across various asset markets, accumulate foreign exchange reserves, or develop instruments that would allow domestic private entities to issue abroad. The foreign currency can be swapped into the domestic currency, or, when this is difficult, into a currency that is closely co-related to the domestic currency and for which liquid optional markets exist. Issuing currency-hedged foreign debt would prevent a borrowing strategy targeted solely at reducing interest rates and softening internal budget constraints. As the international derivative markets have grown in sophistication, the possibilities of hedging the risks associated with borrowing in foreign currencies have greatly expanded. Borrowers can respond to opportunities to exploit market niches and expand their investor base without incurring exchange rate risk. Similarly, they can use the interest rate swap market to manage the maturity structure of their external debt.
The amount that can be hedged is limited, however, because counter-parties are usually subject to a ceiling on total exposure to any individual country. However the developing countries have limited possibilities of exploiting market niches, moreover to expand their investor base. These countries seem to be at financial risks all the time,regardless of the attractive opportunities. They just cannot seem to meet their financial obligations but they continue to take lengthy financial risks in the form of loans from the World Bank, the I.M.F and other expatriate organizations. Since it would seem that they do not fully understand the risks involved, they are often faced with harsh and depressing financial repayment obligations.
Many underdeveloped countries that have borrowed heavily in foreign currencies are now faced with important policy challenges, such as on how to manage their currencies, interest rates, and maturity risks associated with their debts. However in order to implement policies that will help fulfil their obligation to external creditors, it requires management by non-political and non bi-partisan sections of their community. This is not an easy task for administrations whose goal is earn the highest return from their resources, and satisfy their domestic demands. In addition of self-centered objectives, management of the risks associated with external exposures requires significant technical expertise, sophisticated information technology, and strictly controlled internal management procedures, with disciplined enforcement of internal trading and exposure limits. These requirements are difficult to satisfy in the best of circumstances; they are particularly difficult in emerging market countries.
Some emerging markets have found it hard to attract qualified and experienced staff, build adequate information and control systems, and develop the administrative controls necessary to manage overall exposures since they start out without the necessary financial tools to support these initiatives. Also, the influence of a countrys external position on its creditworthiness is measured in terms of the scale of its existing obligations. According to the World Bank the scale of a countrys external payment obligation is measured by the ratio of its external debt to GDP.As is the case with high inflation /high debt countries, credit rating agencies tend to rate them differently than low debt countries. The countrys capacity to service its external obligations is assumed to be reflected in the growth rate of its exports, its current account position, the ratio of its non-gold international reserves to imports and its real exchange. In many instances the developing countries have low ratings in all of these areas.
Since they will not qualify in these areas it is incumbent upon them to manage the other areas of ratings. These areas are the internal economic, political and social factors that also influence their credit ratings. In addition to these areas of management, the O.E.C.D recommends that: – Management should be shielded from political interference to ensure transparency and accountability. – Debt management should be entrusted to portfolio managers with knowledge and experience in risk-management techniques, with the performance of these managers measured against a set of criteria defined by the ministry of finance. – Finally, sufficient resources should be allocated to hiring high-quality staff and acquiring sophisticated support systems. – For countries that have been experiencing a high rate of inflation, a sharp reduction in inflation would significantly improve the countrys rating.
Quite often the strategy of these underdeveloped countries is to implement policies to feed, clothe and house themselves at the expense of the lenders or investors instead of pursuing economic polices such as those implemented by Russia. Their main focus should be to improve the countrys current account balance along with the implementation of a program for revival of growth through economic recovery programs. Bibliography References Agnor, PierreR.and Hoffmaister, Alex W (1995) Money, Wages, and inflation in developing countries.I.M.F report. Belton, Catherine (10/2000): Russia-all is forgiven. Business Week, October 9th.2000.
Dubash, Navriz Dr. (2000) The right conditions, the World Bank structural adjustment program. World Bank Report, March 2000. J.P.Morgan (2000): Emerging benchmark index. September 2000.
Organization for Economic Corporation and Development. (1995): The use of economic instruments for financial management in developing countries.O.E.C.D reports 1995. Business Reports.