work on securitization and credit enhancement. given that at present, a number of bonds issued by asian entities are below investment grade, the use of securitization and credit guarantees to enhance the quality of these issues can act as a near - term solution to giving these issues a credit quality acceptable to investment managers, and give them the needed initial exposure to private investors. the introduction of these new instruments – which would attain a credit quality acceptable to investment managers by achieving a high rating from international rating agencies – would also benefit the international financial community by providing investors with a greater diversity of products and instruments for investment. more importantly, it would enable smaller corporate entities – who would otherwise be limited to financing themselves through short - term commercial bank lending – to access bond markets and find a source of funding more suitable to their needs. cross guarantees a means of helping economies with less developed local bond markets to issue debt in the regional market may be through the use of cross guarantees. as part of regional financial cooperation and a step towards greater regional financial integration, cross guarantees can reduce the cost of funding for smaller economies with lower credit rating through guarantees provided by more advanced nations. the use of cross guarantees will be similar in principle to the use of credit enhancements, resulting in improved credit risk of bond issuances as well as lower funding costs for bonds. but while credit enhancement can be offered by a third party, cross guarantees are made by countries within the region in an effort to collectively develop the region. a number of concerns may arise with the use of cross guarantees, namely the problems of moral hazard arising from any type of guarantee, the resultant price distortion, and the perceived free rider problem of the smaller economies. to lessen the risks that would arise from moral hazard, such a guarantee may only be partial. the problem of price distortion will be difficult to mitigate, given that bonds issued with cross guarantees by definition will not have their total risk reflected in price. however, this in turn will help benefit issuers in terms of lower cost of funding. with regards to the free rider problem, it is clear that a system of cross guarantees will benefit the lesser developed economies most, since they will not be in a position to guarantee any other issuers. however – with the spirit of regional financial cooperation for development of asia as a whole in mine – countries with more advanced financial systems may decide to offer these guarantees for a limited period of time. proposals for development and integration : enhancing market infrastructure currency arrangements

thirachai phuvanatnaranubala : the strengthening and development of regional bond markets speech by mr thirachai phuvanatnaranubala, deputy governor of the bank of thailand, at the apec business advisory council meeting, tokyo, 16 may 2003. * * * lessons from the asian crisis – a local perspective thailand ’ s experience the crisis of 1997 brought to light weaknesses in the country ’ s financial sector development and the sequencing of liberalization policies. prior to 1997, the function of financial intermediation fell almost entirely on commercial banks. they mobilized funds mainly through deposits, which accounted for roughly 80 percent of domestic banking liabilities. at the same time, they held almost 70 percent of total financial sector assets, most of which were in the form of credits to the household and corporate sectors. direct financing through the domestic bond market – through both public and corporate bonds – was relatively small and not well developed. nine consecutive years of fiscal surplus between 1988 and 1996 provided no incentive for the government to issue regular and substantial amount of government bonds. the resultant limited supply of government bonds inhibited the development of a risk - free benchmark against which to price corporate issues and mark to market daily trading. the crisis brought to the fore an imbalance in the structure and operation of the thai financial markets. with financing channels limited to bank loans, thai businesses faced severe liquidity crunch as the banking sector sharply curtailed their credit operations amidst high non - performing loans and massive recapitalization needs. this intensified the economic slowdown, as highly leveraged businesses and corporates were cut off from their traditional source of funding. developing the local bond market in the aftermath of the crisis, authorities in the region mounted an effort to redress the imbalance in the financial system. in thailand, development of the domestic bond market was given a high priority, partly because of the necessity to fiscalize the cost of financial sector restructuring and partly as an alternative - funding source to reduce reliance on bank intermediation. a more developed bond market provides the economy with a more balanced financial infrastructure, thereby diversifying the risk of intermediation across a large number of institutions and market players. this so - called sharing of risks through pricing of risks and trading of risks is aimed to achieve a better structure and balance between bank financing, equity financing, and debt financing. development of a liquid bond market also provides other benefits. it allows private and public sector issuers to finance long - term projects at