Latin American Capital Markets

328 CLEMENTE DELVALLEposed on products and/or market participants.These restrictions have seemingly sustainableobjectives, but they usually hide their real purposes and negative impacts. Forinstance, the restrictions protect the interests of certain market participants (for example,pension funds), the existing tax base, and inefficient bureaucracies. At somepoint, development of the fixed-income market would threaten banks, which wouldlose a share of their intermediation business; therefore, banks might use their politicalinfluence to establish certain types of statutory restrictions. Statutory restrictions couldbe introduced or not removed because of the government's lack of capacity to collecttaxes or because of its inefficient bureaucratic system.A Virtuous CircleIn a virtuous scheme, the government, as both issuer and developer, establishes the basefor corporate bond market development by implementing a comprehensive strategy ofmarket development The virtuous circle begins with a sound sovereign issuer and regulatorcommitted to overall market development that sets the base for the corporatebond market by issuing benchmark bonds, improving infrastructure, building a soundlegal framework, and sharing more developed intermediaries and investors. In addition,new hedging and collateral options arise with the government bond market The processof developing the private sector fixed-income securities market leads to betterpriced and more liquid corporate bonds, technological and financial innovation, and possiblyprivate benchmarks that reduce the government's role.The benefits of the corporatebond market—namely sustainable and balanced corporate debt structures, a morediversified financial system, less systemic risks, better shock absorbability, and more efficientcapital allocation—reinforce government finances, corporate governance, andeconomic efficiency in general, closing the circle and strengthening the entire economy.A Vicious CircleIn a negative scenario, the government can hinder the market by running unsustainabledeficits or by not being proactive, and thus starting a vicious circle.The governmenthinders market development by crowding out the market, carrying recurrentdeficits, and using captive sources of funding or, in some cases, by not funding needsor taking recourse to external financing. Crowding out could cause higher interestrates, limit the investor base, and make the legal and tax frameworks inadequate. Pressuredby the need for substantial funding, the government might act in a selfish manner;not sharing infrastructure or the investor base. Moreover, captive sources of fundsCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub