Quantifying the 'Euroclearability' effect on emerging markets

Euroclearability brings on gains for emerging markets including lower borrowing costs and facilitating the access of foreign investors to local markets, according to new report

Euroclear Bank, in cooperation with PwC, has published “Impact of Euroclearability”, a white paper which examines the benefits markets can achieve when they become Euroclearable including increased liquidity in domestic sovereign bond markets, leading to higher trading volumes and lower bond yields in secondary markets.

Markets that are Euroclearable demonstrate a number of features that enable international investors to access domestic bond markets, such as efficient and secure asset ownership, an investor-friendly tax and regulatory environment and other features which enable connectivity between domestic bond markets and international investors.

Controlling for wider factors, PwC finds that Euroclearability is associated with a reduction in sovereign borrowing costs of 28 basis points (bps) in primary bond issues. This is broadly equivalent to the yield differential of one credit rating notch (i.e. the difference between A- and BBB+).

For five countries that have recently obtained Euroclearability, the potential gain from lower borrowing costs is associated with a GDP boost of US$3.8 billion over 10 years. These countries reported a rise in spending on areas that benefit society, such as healthcare.

Euroclearability can provide the following benefits to an economy:

·         Enhancing the international profile of the country and attractiveness to international investors.

·         Facilitating access to international investors, enabling corporates and governments to raise capital more efficiently or at lower cost.

·         Reducing the overall volatility of borrowing costs due to a more stable investor base.

·         Facilitating access of foreign investors into local markets in a more secured and standardized way.

·         Providing local investors with the opportunity to trade financial instruments with a wider range of domestic and international investors.

Valérie Urbain, CEO Euroclear Bank, says, “We are very pleased with the release of this study. The paper quantifies how Euroclearabilitycreates a powerful single pool of liquidity resulting in strong macro-economic benefits for emerging markets.”

“Our analysis shows that achieving Euroclearability can yield significant economic benefits to emerging markets through lower borrowing costs for sovereigns and corporates. Lower borrowing costs could translate into broader welfare gains to Euroclearable countries alongside encouraging public and private investment in infrastructure,” says Nick Forrest, director in the PwC's Strategy & Economics practice.

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