Dollar-denominated issues have been flooding out of eastern Europe recently, particularly from Russia and Hungary. But until now, European emerging market currencies have played only a small part in the Eurobond market, with the Czech koruna the only one used extensively. The main impediment to new currency sectors for Eurobonds has been the intricate convertibility restrictions placed on most central and east European currencies. Only the Czech koruna is 100% exchangeable with no strings attached. Even the Hungarian forint is still not fully convertible in spite of Hungary's rapid economic reforms and near-western level of financial regulation.
But this may soon change, with investors and issuers showing a growing appetite for even non-convertible currencies. The first step to placing non-convertible local-currency debt so far has been through structured products, particularly on Russian treasury bills, giving dollar-bond investors full exposure to a local-currency debt instrument issued in the domestic market. And foreign investment in local-currency debt has been positive for the issuers, usually sovereigns or municipalities, since the flood of foreign capital has caused yields on almost all treasury bills and municipal debt to fall sharply over the past year throughout eastern Europe and the CIS.