| LONDON, March 21
LONDON, March 21 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
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
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
"It's a very good idea for countries in the region to get
guarantees on their debt, from international economies like the
United States that can afford it."
Tunisia's finance ministry said last week the country could
issue a U.S.-guaranteed bond totalling $400-500 million, its
first international bond since 2007.
Plans for a conventional Eurobond last year were put on hold
after the ousting of President Zine al-Abidine Ben Ali.
Tunisia's still boasts an investment grade rating, helped by
a relatively contained budget deficit.
But at the lowest possible investment grade rating with
negative outlook from all three major ratings agencies, the
country is at risk of tipping into junk territory.
The guarantee, from the AAA/AA+ rated United States, is
likely to boost the rating of the bond, investors say.
"Clearly, having debt issued with the sovereign risk of the
United States is superior to having it issued with the sovereign
risk of a country that has just undergone a revolution," said
Daniel Broby, chief investment officer of fund manager Silk
"The guarantee will allow the issue to be priced more
A precedent was set in 2002 when Israel received a package
of U.S. loan guarantees to help the economy deal with a
recession caused by a global downturn and wave of Palestinian
Israel has issued $4.1 billion under the programme and still
has billions left to use. But it hasn't issued anything under
the programme for a number of years, since its own credit
ratings have risen.
Investors speculate that countries such as Egypt, which has
gone back to the drawing board to negotiate a loan from the
International Monetary Fund, may follow suit in getting a U.S.
guarantee on their debt.
"If Tunisia gets it, I suspect others will ask - Greece
could do with such a guarantee right now as well," said Broby.
Greece successfully completed a debt exchange earlier this
month after months of market anguish, but its new debt continues
to trade at very weak levels.
The beauty for the guarantor is that a little money can go a
The U.S. State Department announced last month that it was
making $30 million available for loan and bond guarantees to
Such a sum can go much further, analysts say, as the
guarantee only needs to represent the probability of default.
So if investors place a 5 percent probability of Tunisia
going into default, the country can easily borrow $600 million
with only a $30 million guarantee.
In the case of St Kitt's, a small $12 million guarantee from
the Caribbean Development Bank will ensure the country can pay
interest payments on its debt, according to David Nagoski,
director at White Oak Advisory, advisers on the deal.
"Creditors can take comfort from the fact that a
multilateral institution other than the IMF has reviewed the
overall programme and feels sufficiently confident about future
debt sustainability to provide support through a guarantee,"
The African Development Bank provided a similar guarantee
when Seychelles restructured its debt in 2010.
The World Bank has also guaranteed emerging debt in the
past, most notably Argentina.
Argentina defaulted on a World Bank-guaranteed $250 million
bond in 2002 and has not yet been able to re-enter international
capital markets, but investors in that bond were able to recoup
their money via the guarantor.
But the danger for borrowers is that investors no longer
trust their credit without the crutch of the high-grade
guarantee. Too large a guarantee can reduce investor confidence
in a borrower's ability to issue alone in future, analysts say.
Meanwhile, the danger for the guarantors is that they are
increasingly forced to open their wallets, once such a precedent
has been set.
"Giving such guarantees creates moral hazard. It may be seen
as a cheap source of aid in the short run but it debases the
sovereign status of the guarantor in the long run," said Broby.
"Imagine a world 10 years down the line, where the U.S. has
guaranteed every restructured nation's bond."