ADBI series on Asian Economic Integration and Cooperation
Edited by Masahiro Kawai, David G. Mayes and Peter Morgan
Chapter 11: Developing Asian Local Currency Bond Markets: Why and How?
Mark M. Spiegel 11.1 INTRODUCTION Since the 1997–1998 Asian financial crisis, there has been a perception that Asian financial markets would be aided by the existence of developed local currency bond markets. In part, this perception stretches back to former Federal Reserve Chairman Alan Greenspan’s ‘spare tire’ argument that bond markets would provide alternative vehicles for intermediation in the event that primary sources of financing, such as bank and equity finance opportunities, were disrupted (Greenspan 1999). While others have expressed skepticism at this argument, it is generally agreed that the absence of well-developed domestic and regional bond markets exacerbated the 1997–1998 crisis (Park and Park 2003). At a minimum, the opportunity to issue in local currencies would mitigate currency mismatch difficulties. Indeed, International Monetary Fund (IMF) conditionality requirements during the 1997–1998 crisis included explicit calls for the development of local currency bond markets in some countries, such as Thailand (Batten and Hoontrakul 2008). In response, Asian governments have adopted initiatives to promote local currency bond finance through their initial Asia Bond Markets Initiative (ABMI) and through the Asian Bond Funds 1 and 2 (ABF1 and ABF2). While Asian bond markets have grown markedly since the launch of these initiatives, there is still a perception that the region is underserved by domestic bond markets (Eichengreen and Luengnaruemitchai 2006). Moreover, progress to date has been heterogeneous within the region. In part, local currency bond market development has been hindered by the lack of sufficient economies of scale, due to...
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