WASHINGTON (Reuters) - Pursuing so-called ‘euroclearability’ can help some emerging market economies lower borrowing costs by over $13 billion over 10 years while increasing their investor base, a report showed on Thursday.
Euroclearability is seen as one of the last stages of capital market development, and would only benefit countries with relatively larger economies and local bond markets, Nick Forrest, who headed the report as director of financial services at PCW UK, told a conference on the sidelines of the spring meetings of the International Monetary Fund and World Bank.
The process of becoming ‘euroclearable’ - establishing a clearing and settlement link with Belgium-based Euroclear - involves high levels of transparency as well as specifics on size and structure of the debt to be issued, among other aspects.
India, Brazil, Turkey, Indonesia, Philippines and Colombia could see their borrowing costs fall by an average of 28 basis points, in a range of 14-to-42 basis points, saving them over $13 billion over the next 10 years, according to the study by PWC for Euroclear.
The drop in borrowing costs, the report said, is comparable to a one-notch upgrade from a credit ratings agency.
“This is extremely important to developing local markets” and a key benchmark for countries to reach, said Thordur Jonasson, who advises governments and agencies on domestic debt market development and risk management as deputy division chief at the IMF.
But achieving the ‘euroclearability’ tag is not necessarily an objective of these emerging economies, but an added benefit of focusing on improving fundamentals.
Cesar Arias, director of public credit and national treasury at Colombia’s finance ministry, told Reuters the tag would be a bonus but his country’s improved fundamentals have been the main reason behind a sharp lowering of borrowing costs.
He said Colombia increased its foreign investors in local bonds from 4% to over 25% while lowering costs by nearly 300 basis points over the last four years.
“That was without euroclearability,” he said.
The study said corporate borrowing costs would also be reduced, though by a smaller amount, as there is typically a correlation between corporate debt and the sovereign’s interest rates.
The impact to corporate debt would be of 10-to-18 basis points, the report said.
Reporting by Rodrigo Campos; Editing by Andrea Ricci