Motivations for Swap-Covered Foreign Currency Borrowing

Posted: 6 Jul 2011 Last revised: 31 Jul 2011

See all articles by Anella Munro

Anella Munro

Reserve Bank of New Zealand

Philip D. Wooldridge

Bank for International Settlements (BIS)

Date Written: July 3, 2011

Abstract

We explore the motivations for borrowers to raise foreign currency debt and swap the proceeds into local currency, rather than borrowing the local currency directly. The growing, and in some markets large, volume of such opportunistic swap-covered borrowing, suggests that it can be a cost-effective means of raising local currency funding, yet the motivation to borrow this way is not adequately explained in the literature. We consider several market frictions that can explain this borrowing behaviour, focusing on potential differences in the market access of two natural counterparties to a swap: residents issuing foreign currency bonds and non-residents issuing local currency bonds. Based on a sample of 13 Asia-Pacific countries, we find that the characteristics of foreign currency bonds issued by residents and local currency bonds issued by non-residents differ in ways that are consistent with these issuers overcoming market limitations and arbitraging cost differentials.

Keywords: currency swaps, interest rate parity, local currency debt

JEL Classification: F36, G15, G32

Suggested Citation

Munro, Anella Elizabeth and Wooldridge, Philip D., Motivations for Swap-Covered Foreign Currency Borrowing (July 3, 2011). Available at SSRN: https://ssrn.com/abstract=1878104

Anella Elizabeth Munro (Contact Author)

Reserve Bank of New Zealand ( email )

2 The Terrace
P.O. Box 2498
Wellington, 6011
New Zealand

Philip D. Wooldridge

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland

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