Financial stability implications of local currency bond markets: an overview of the risks

Latin American countries have made considerable progress in developing their local currency bond markets. With more sizeable local bond markets come improved efficiency of financial intermediation, diversification of intermediation, reduction in the concentration of risks in the banking sector and financing of fiscal deficits in a non-inflationary manner. In addition, the more developed local currency debt markets in these countries should help mitigate important risks and sources of vulnerabilities, eg by reducing systemic instability associated with currency and maturity mismatches. A growing body of evidence says that the development of local currency bond markets, which has gone further than many had expected a decade ago, has strengthened the stability of local financial systems in the emerging market economies as a whole.