The Inter-American Development Bank has begun to dip its toe into local-currency borrowing and lending over the past few months. Previously, the IDB could only borrow in Latin American currencies if it immediately swapped the proceeds into dollars; now it can also borrow in them if it immediately lends the proceeds to a specific project.
But IDB observers hold out hope for a much more aggressive use of the bank’s liabilities. A report from the Center for Global Development, whose authors include former IDB chief economist Ricardo Hausman and former Mexican finance minister Angel Gurria, says that the bank should issue benchmark bonds in the international capital markets, denominated both in nominal and inflation-linked Latin American currencies.
“IDB bonds with AAA rating issued under New York law would make it possible to separate currency risk from sovereign and convertibility risks,” notes the report. “The bonds in domestic currency could be used to provide insurance against exchange rate risk.”
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The report even notes that developing such markets would not necessarily entail the IDB taking on exchange-rate risk itself: it could lend the proceeds out in the same currency.