Likewise, the development of bond markets has been gaining attention in a growing number of developing countries in all regions, though in many places bond markets are relatively new.

In addition to providing more stability, bond markets are expected to stimulate domestic savings and investment.

Global stock markets have, overall, reached new highs. And credit markets show low spreads, while long term bond yields have fallen in most advanced economies.

However, since the dynamics of domestic currency bond markets are linked to external bond markets, they are not immune to external volatility, and recent experience calls into question the effectiveness of local capital markets as a buffer against external volatility, particularly for a country considered as a high credit risk.

These countries have little access to bond markets and to medium to long term commercial bank lending.

For instance, even creditworthy municipal authorities could benefit from assistance in meeting the requirements of accessing bond markets.

Mr. Bond! Mr. Bond! Mr. Bond!

11 The Asian Bond Market Initiative was endorsed at the ASEAN 3 Deputies Meeting held in Chiang Mai in December 2002. Its objective is to develop efficient bond markets in Asia.

Moreover, financial markets consider QE so likely that the largest part of its bond rate and exchange rate consequences have already been priced in. Should the ECB disappoint expectations, bond and foreign exchange markets would confront an abrupt and damaging unwinding of positions long term interest rates would rise, stock markets would sink, and the exchange rate would appreciate.

Yes, financial markets in troubled countries for example, Russia s currency, equity, and bond markets have been negatively affected. But the more generalized contagion to global financial markets that geopolitical tensions typically engender has failed to materialize.

Bond. James Bond.

Bond. James Bond.

Bond? James Bond?

38 For example, through strengthening institutions that provide long term finance, such as development banks and, where appropriate, bond markets.

South Africa was the only country in sub Saharan Africa to issue on international bond or equity markets in 1997.

Under the OMT program, the ECB can replace foreign outflows from sovereign bond markets through direct purchases, putting Spain on par with non eurozone countries like the United Kingdom. And, to the extent that there is even an informal price target associated with the ECB s commitment to purchase bonds, foreign outflows, at least from the sovereign bond market, are automatically replaced, in full, with ECB cash.

Meanwhile, the main transmission channels of monetary stimulus to the real economy the bond, credit, currency, and stock markets remain weak, if not broken. Indeed, the bond market channel is unlikely to boost growth.

Some eurozone countries borrowed excessively and have been punished by the markets, perhaps deservedly so, while others, in the resulting climate of anxiety, have become targets for speculators. On July 21, eurozone leaders agreed to make more extensive use of the new European Financial Stability Facility (EFSF) by permitting it to purchase endangered eurozone countries debt in secondary markets.

Local bond markets provide alternative sources of financing for companies and Governments, which avoid exchange rate risks inherent to foreign financing.

Developing countries are increasingly financing their infrastructure through international capital markets, a trend reflected in the growth of their commercial bank borrowing and their increased use of bond and equity markets.

A eurozone breakup (including a Greek exit and loss of access to capital markets for Italy and or Spain).

That left individual eurozone members exposed to brutal pressure by financial markets at a time when excessive private debt was turned into unsustainable public debt. Suddenly, the eurozone had become a straightjacket.

My name is Bond, Jamal Bond.

James Bond. Oh, yes, Mr Bond.

That pledge alone stabilized borrowing costs and dramatically reduced interest rate spreads for struggling eurozone countries. Investors belief that the ECB would buy up government debt if bond yields rose too high was enough to restore calm indeed, no central bank intervention in secondary markets has been necessary since then.

Many countries therefore view the development of local currency bond markets to be an important policy priority that reduces vulnerability to external shocks.

Though interest rates across the European Union are at historic lows, government debt in the eurozone could come under severe pressure should bond markets re evaluate the riskiness of sovereign borrowers. That is a consideration that should weigh heavily on indebted governments as they submit their budgets for scrutiny to the European Commission.

Bond

Bond

Bond.

MAN ON MEGAPHONE Ahoy, Mr. Bond. Ahoy, Mr. Bond.

Expanding local currency bond markets could expedite a shift from dollar denominated cross border loans to local currency loans, bringing benefits to both investors and borrowers.

One reason for this is that long term interest rates are affected not just by the actual bond purchases, but also by financial markets expectations about future monetary policy. Indeed, just one day after the ECB made its announcement and weeks before the purchases began interest rates fell by a fraction of a percentage point throughout the eurozone.

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