Foreign guarantors help plug emerging funding gap

Wed Mar 21, 2012 2:32pm GMT

By Carolyn Cohn

LONDON, March 21 (Reuters) - With refinancing becoming a giant headache for sovereign debtors across the globe, some struggling emerging economies are securing guarantees from richer nations or multilateral development banks to bolster their chances of selling bonds to wary investors.

The guarantee provides the emerging country borrower with access to otherwise-closed international capital markets, while the guarantor is extending financial support to a friendly trading partner at relatively low cost.

It's already being used in one Arab Spring country - Tunisia - and analysts say it could extend to others in the region, like Egypt.

Tunisia, which suffered several ratings downgrades in the past year following its Arab Spring uprising, last week said it was planning a U.S.-guaranteed dollar bond in the next few months.

And the tiny indebted nation of St Kitts & Nevis last week completed a debt exchange with new debt carrying a small guarantee from the Caribbean Development Bank.

The guarantees are particularly helpful in countries in the Middle East that have been through political and financial turmoil in the past year.

Setting a precedent for this type of guarantee, the United States underwrote a borrowing programme for Israel 10 years ago to help the country out of economic difficulties.

"Over the medium term, we are going to see a series of funding gaps in the Middle East region - the guaranteeing of sovereign debt is going to be one way of resolving this," said Florence Eid, chief executive of research and advisory firm Arabia Monitor.   Continued...

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