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Two economists propose new bond issue mechanism to ease currency mismatches in Latin America, Caribbean

Two prominent economists have proposed a new monetary unit for bond issues by multilateral financial institutions to ease the debt burden of developing countries.

Economists Barry Eichengreen of the University of California at Berkley and Ricardo Hausmann of Harvard University presented their proposal in a paper - titled “Original Sin: The Pain, the Mystery and the Road to Redemption” - at a conference held Nov. 21-22 at the IDB in Washington, D.C., on Currency and Maturity Matchmaking: Redeeming Debt from Original Sin.

The new monetary unit they proposed would be based on a basket of monetary units of developing countries and would be indexed to account for inflation.

The proponents of the unit, to be called EM, say it would help ease the burden of what the economists call “original sin,” borrowing in hard currency that becomes ever more expensive to repay as the national monetary unit in a developing country suffers devaluations during financial crises bought on by contagion, instability or other unpredictable and uncontrollable events.

The economists said their studies have shown that the so-called EM-indexed bonds would provide an attractive return to investors with a “relatively low volatility.”

“The only practical way for a large group of countries representing over 90 percent of the population and the GDP (gross domestic product) of the developing world to escape original sin is n international initiative to develop an EM index and a market in claims denominated in it,” the two economists said.

The keynote speaker at the conference, U.S. Assistant Secretary of the Treasury Richard Clarida, said the proposal of the three economists and other ideas presented at the conference would be closely examined for their possible effectiveness in reducing the debt exposure and volatility of developing countries.

Several different views during the conference, moderated by IDB Chief Economist Guillermo Calvo, were expressed by senior economists from public financial institutions, universities and the private sector during the conference.

Calvo stressed the importance of responsible national fiscal policies and the danger of “sudden stops” in financing flows brought on by lack of confidence in a country by international investors.

The Inter-American Development Bank is active in operations that allow countries to take out debt in national currency as opposed to a foreign hard currency. On Nov. 20 the Bank approved a $5 million private sector mortgage bond guarantee operation for Colombia to support national currency issues.

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