East Asia Swap Guarantee Facility

completed

Subsequent to the Asian crisis, IFC identified a growing reluctance amongst international banks to provide suitable medium to long-term risk management products to customers in its target markets. This has been due to a tightening of country and corporate credit as well as tenor limits set by bank credit committees. Instead, international banks concentrated on the strongest credits in each country and provided only short-term instruments. To address the resulting gap IFC invited a number of international banks to consider participating in a facility whose objective is to provide credit enhancement to swap transactions in the region, encouraging them to provide longer dated swaps or to offer products to a wider range of credits, than they may do otherwise. In the Facility, IFC would provide credit enhancement covering certain swap transactions that are (i) of longer maturity (ii) have at least one payment leg denominated in the local currency, (iii) have no optionality and (iv) and would be used for hedging purposes only. Under this proposed facility (the “Facility”), IFC will guarantee up to 40% of credit losses (up to a maximum of US$100 million), covering a pool of “eligible transactions” originated during a term of three years following the establishment of the Facility and entered into by Deutsche Bank with a list of approved “eligible counterparties”. Within the context of the Asian crisis, as well as the current global slowdown, it is particularly important for regional trade and investment flows to be maintained. Risk management products are currently only available for shallow tenors to a select group of top-tier corporates and financial institutions in the region. By extending the credit limits and tenors, as well as, widening this circle to firms, the proposed Facility is likely to play a critical role in catalyzing investment flows to the region. Companies with local currency revenues can therefore borrow in hard currency, and hedge the currency mismatch with a risk management product. Hence, the Facility will help develop the regional swap and risk management markets by providing longer dated hedging tools to local companies, thereby contributing to the development of a broader and deeper financial market. Specifically, an increase in risk management transactions should contribute to improving liquidity and lowering bid/offer spreads in these markets. In addition, since only transactions which have at least one local currency leg will be eligible for inclusion, the Facility will contribute especially to the development of the local capital market.The amount and reach of risk management products provided by international banks in the region is limited by the country and credit limits set by the credit committees of these banks. By providing credit enhancement for swap transactions in the region, IFC will enable Deutsche Bank to undertake longer dated swaps, as well as offer products to a wider range of credits than it would do otherwise or to clients with whom it has limited head room.In the wake of the East Asian crisis, and within the broad framework of the World Bank Group’s strategic objectives of financial sector resiliency in the region, a key IFC priority in crisis-affected countries is the deepening and diversification of financial systems through institution building and the introduction of new financial instruments and mechanisms. In addition, the promotion of risk management facilities to support trade and investment flows in the region continues to be an area of focus for IFC in the light of the global slowdown and heightened risk perceptions about the region. The proposed project is fully consistent with this strategy.