Latin American Capital Markets

298 CLEMENTE DELVALLEquence has not always been followed; sometimes the level of competition, the gradeof macroeconomic stability, or the investor base modifies it. Although the four typesof markets follow a sequence, they have a close relationship, and one helps to buildor improve the other For example, the money market helps to provide liquiditytoward development of the government bond market, supports the short-termprocess of building the yield curve, and reduces the costs of government securities.The government bond market provides short-term bonds and standardized issues tothe money market, ensuring the supply of instruments to maintain a proper level ofliquidity. Both the money and government bond markets help to build the privatesector bond market by providing infrastructure, tools for price discovery, and hedgingmechanisms.The corporate bond market expands investors' options and leads toa more balanced domestic financial architecture, reinforcing the development of theentire bond market.The derivatives market arises as a consequence of the need forparticipants to hedge their risks; its creation leads to low interest rates and better financialmanagement practices. The benefits of that market spill over to the otherthree markets and reinforce their development.The links among markets show notonly the crucial role of capital markets as a tool for economic development, but alsothe importance of governments taking the links into account when designing economicpolicies. Figure 10-1 shows the correlation between development and deepeningof capital markets; the size of each circle shows the relative significance of themarket it represents.Since capital markets are a means for promoting economic development,government needs to take a capital market developer's role and create and promotea government securities market The developer's role has two dimensions: (a) governmentbond issuer and (b) regulator and developer for private market participants.Therefore, it appears clear that the government, through the ministry of finance (issuerand market developer), has to lead the development process. In some countries,this leadership could be passed on to the securities regulator, especially when developmentmoves away from the government bond market into the other markets. It isimportant to note that, particularly in small economies, central banks play a key rolebecause they have some financial and market knowledge and capacity and need efficientmoney markets to support their monetary policy operation. If the governmentdoes not issue or is not capable of issuing bonds, the central bank must assume thedeveloper role (for example, as in Chile), so that, in some cases, central banks arethe only issuers of short-term instruments in the money markets.Success lies in building a close partnership between the finance ministry, theregulators, and the central bank The partnership is extremely important at the be-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub