Latin American Capital Markets

308 CLEMENTE DELVALLEfact, secondary market liquidity is the most complex goal because it is extremely sensitiveto a wide combination of factors, such as the existence of standardized and fungibleinstruments, diversified investors, safe and efficient infrastructure, conducive regulation,a well-balanced tax regime, and sound monetary and fiscal policies. A credibleand sound framework of market regulation and supervision needs to be in place toavoid loss of confidence by the investors due to abuses by intermediaries and issuers.Moreover; settlement and depository systems have to be upgraded, and governmentbonds need to be fully dematerialized in order to achieve delivery versus payment(DVP) standards. In addition, credit rating and disclosure systems have to be designedand put in place to satisfy specific corporate bond market necessities. At this stage,the government needs to carefully analyze the use of primary dealers as market makersand the role of intermediaries in the secondary market Another major challengeduring this stage is to develop and expand the investor base, promoting long-term investorssuch as institutional investors, including pension and insurance funds.The Government Bond MarketBond markets are the link between issuers and investors with medium- and long-termfinancing and investment needs. The government bond market is the backbone ofmost fixed-income securities markets, not only in developed countries but also in developingones (World Bank and IMF 2001 ).The benefits of such markets are wide andcan be viewed from both macro and microeconomic perspectives.Benefits of Developing a Government Bond MarketFrom a macroeconomic point of view, the government securities market provides abenchmark yield curve, which helps not only to determine the prices of the assets inthe economy and improve the transmission conduit of monetary policy but also tomake comparisons among countries.This market is a suitable channel for funding domesticfiscal deficits without using the central bank and, as a consequence, for reducingthe potential damage to monetary policy. Moreover; the behavior of the cost offunding constitutes a market test for government policy.Taking into account the closerelationship between monetary policy and securities markets, the government bondmarket strengthens the transmission of monetary policy through the use of indirectmonetary policy instruments in order to achieve, for example, inflation targets. Anotherimportant advantage is that the government bond market reduces foreign cur-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub