Motivations for swap-covered foreign currency borrowing

August 2009


We explore the motivations for borrowers to raise funds in a currency unrelated to their operations and swap the proceeds into the desired currency, instead of borrowing the desired currency directly. The growing, and in some markets large, volume of such opportunistic swap-covered borrowing is a puzzle that is not adequately explained in the literature. We consider various market frictions that may explain this borrowing behaviour, focussing on potential differences in the market access of two natural counterparties to a swap: resident and non-resident bond issuers. 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 arbitraging cost differentials.