Bond Markets in Latin America: On the Verge of a Big Bang? by Eduardo Borensztein, Kevin Cowan, Barry Eichengreen, Ugo

By Eduardo Borensztein, Kevin Cowan, Barry Eichengreen, Ugo Panizza

Developing neighborhood bond markets is excessive at the coverage time table of Latin the USA. Bond markets are an integral part of a well-functioning monetary marketplace. Facilitating the efforts of private and non-private debtors to factor domestic-currency-denominated, long term, fixed-rate bonds insulates them from the rollover and stability sheet dangers which were primary parts in previous monetary crises. additionally, a powerful bond industry is a manner for nonfinancial corporations to continue their ability to borrow while the banking approach grows reluctant to lend. Latin American bond markets are transforming into, and will even method a "big bang"-like surge, even if major demanding situations stay. this primary complete exam of the significance of neighborhood bond marketplace improvement in Latin the US presents conceptual and comparative exams, case experiences of six nations, surveys of organisations and traders, and a cross-country financial research of the determinants of bond industry improvement. The book's case reviews of Argentina, Brazil, Chile, Colombia, Mexico, and Uruguay, written through state specialists, persist with a standard method, with every one providing a background of that country's bond industry improvement, a accomplished and certain info set on either deepest and public bond markets, surveys of organisations and traders, and (in many chapters) firm-level research. an internet appendix makes to be had the original info units, together with result of specifically designed surveys of agencies and traders individuals, utilized in the book's studies.

Contributors: Camila Aguilar, Patrick Bolton, Eduardo Borensztein, Matías Braun, Ignacio Briones, Mauricio Cárdenas, Andre L. Carvalhal da Silva, Sara G. Castellanos, Kevin Cowan, Julio de Brun, Barry Eichengreen, Roque B. Fernández, Xavier Freixas, Néstor Gandelman, Herman Kamil, Ricardo P. C. Leal, Lorenza Martínez, Marcela Meléndez, Ugo Panizza, Sergio Pernice, Arturo C. Porzecanski, Natalia Salazar, Jorge Streb

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Extra resources for Bond Markets in Latin America: On the Verge of a Big Bang? (MIT Press)

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Unlike bank financing, which creates a source of endogenous fragility due to the asset-liability mismatch, bond financing as a form of long-term finance does not expose firms to the same risks of bank runs and systemic crises. This is, in our view, the main benefit of bond financing in EMEs. By isolating firms from government debt defaults, bond financing provides a ‘‘spare tire’’ to firms and thus reduces the amplitude of the crisis that inevitably follows a government debt default. However, as we have stressed in our earlier writing (Bolton and Freixas 2000, 2005), bond financing is inherently less flexible and may result in higher costs of financial distress.

For the purposes of our analysis, however, we shall not focus on this particular issue. Instead, our main focus is that the key missing characteristic of an EME’s financial system in the existing literature is the absence of any form of government debt default risk. In Bolton and Freixas (2006) we have developed a more general model of the equilibrium mix of bank and market financing than is available in the existing literature, incorporating the possibility of default by the EME’s government on its debt.

In addition, to keep the analysis tractable, we assume that households are risk-neutral and are therefore indifferent as to how they allocate their savings among bank deposit accounts, bonds issued by firms, or government bonds, as long as all these instruments provide the same expected return. The assumption of risk-neutrality is a strong one, and the full policy implications of the development of corporate bond markets may not be identified in a model based on risk-neutral preferences. As we shall discuss below, however, it is likely that the benefits of developing a corporate bond market are even higher when one takes into account the added risk-diversification benefits.

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