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East or west, why local currency is best

Emerging-market and convergence investors have long since stopped buying hard-currency debt from the new European countries after their spreads converged with EU government levels, but the region's local-currency debt is attracting ever more inflows. Kathryn Wells reports on where the best opportunities lie

Perasso: local-currency
investors need good
knowledge of borrowers'
political and economic

PUT A GROUP of analysts and traders together and you can be pretty certain to find disagreement on virtually any topic you care to mention. Not so at emerging-market trade body Emta's summer forum in London at the end of June, where investors in emerging markets showed a remarkable consensus in their preference for opportunities in local-currency bonds over external debt.

This evolution away from paper denominated in hard currency in favour of issues in zloty, peso and won has been a gradual process and shows few signs of being a passing trend. It widens investor bases in these markets, and provides governments with borrowing that is free of currency risk – always something of a holy grail in a country's fund-raising efforts.

The issue of different investor bases is especially relevant in central and eastern Europe, where EU membership has resulted in spreads on external debt from most sovereigns tightening to levels that make it inappropriate for emerging-market investors.

Diversification is crucial for fund managers, and the opportunities available in central Europe mean that even emerging-market funds that prefer opportunities in Latin America and Asia can leave at least part of their portfolios in central Europe.

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