Latin American Capital Markets

PRAGMATIC ISSUES IN CAPITAL MARKET DEVELOPMENT IN EMERGING ECONOMIES51 Ientity that has established a robust track record in the domestic market) utilizes thestrength of its balance sheet or capital structure to provide support for entities thatare interested in tapping the capital market This type of guarantee helps to mobilizelong-term financing for investments and can contribute directly to the developmentof bond markets as a source of capital. It is also a useful tool for promoting local currencyissue. Although the objective of a guarantee is to increase market receptivity forcapital market transactions, it may be structured to perform different functions. Forexample, it may include supporting weak credits, lengthening the maturity of tradedinstruments, and providing a co-insurance mechanism that encourages the participationof other private sector guarantors.There are many policy issues to be considered in providing financial guarantees.First, a decision must be made in terms of the level of support that should beprovided.The provision of partial financial guarantees, while providing the credit supportneeded, may ensure that the issuer has a stake in the transaction and may reducethe moral hazard problem of excessive risk taking. Second, it is important to ensurethat the guarantee facilitates the entrance of other financial sector players in theguarantee business and thus serves as a catalyst in the capital market.Third, from theguarantor's perspective, it is also important that there is good asset-liability managementto ensure that all risks are priced appropriately and incorporated into the managementof its risk capital.ConclusionThis chapter seeks to provide some practical guidelines for implementing capitalmarket strategies, taking the perspective of the government, private sector; or policymakerIt brings together substantive ideas that are presented in several chapters inthe book Starting with a summary of some of the key lessons learnt from past globalexperiences, the aim is to avoid repeating them in this new focus on capital marketdevelopmentThe chapter also presents a useful taxonomy to guide policymakers in theirattempt to facilitate capital market development, focusing on five key ingredients ofmarket reform.The chapter makes the case that there is some possible role for publicsector involvement in fostering the development of capital markets. Public sectorinvolvement could be useful to catalyze the overall market, foster equity and safety, andstimulate a demonstration effect in the types of instruments that are brought to themarketCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub