Press Briefing: Global Emerging Markets Local Currency Bond Fund (GEMLOC)

2007 ANNUAL MEETINGS

INTERNATIONAL MONETARY FUND

THE WORLD BANK GROUP

PRESS BRIEFING:

GEMLOC

Sunday, October 21, 2007

P R O C E E D I N G S

MS. PANG:  Hello.  Welcome and thank you for joining us at this joint press conference on behalf of IBRD and IFC.  I’d like to thank our three speakers for joining us today and will: briefly introduce themHis Excellency Dr. Mahmoud Mohieldin, Minister of Investment for Egypt; Jorge Familiar, Executive Director for Central America,  Mexico, Spain and Venezuela for the World Bank Group; and Michael Klein, Vice President for Financial and Private Sector Development for the World Bank and IFC and Chief Economist for IFC.

Unfortunately, Tan Sri Dr. Zeti Akhtar Aziz, Governor of Bank Negara Malaysia, was unable to join us today.

We will start with a brief introduction to GEMLOC from Michael Klein, and then Michael will hand over to each of our speakers.  And then we’ll open the floor for a Q&A session.  Michael, thank you.

MR. KLEIN:  Thank you very much and thank you very much for coming.

I’ll give a brief overview of the GEMLOC proposal and you will get the points also on paper later on, as we go out, so that you have something to refer to if you wish.  Let me just give the highlights of the basic proposition here.

As you know, a lot of countries around the world would wish to develop their local currency bond markets fundamentally for two types of reasons: one, to be able to get better financing sources in local currency that have the right maturity, for example for infrastructure projects, long-term maturities, and that have the right currency denomination that matches the income streams from--again, for example, infrastructure projects.

The second broad reason has to do with stability issues, macroeconomic stability, countries that feel they want to manage exchange rate risk in new ways, may wish to issue their bonds to foreigners in local currency and shift exchange rate risk, to some degree.  And that, again, is an impetus which drives this interest, in general.

So the thought was can we make a contribution to the general interest in developing local currency bond markets in low-income countries?  And the proposal that we’ve come up with is the following: first of all, let me preface this by saying that both the World Bank and the IFC have a number of other initiatives developing country by country, instrument by instrument a number of local currency markets.  But this is a broader proposition which has the following features.

We start from the observation that something systemic needs to happen.   Seventy percent of emerging market bonds at the moment are denominated in local currency.  This is one stylized fact.  But only 10 percent of the foreign money going into bonds issued by emerging market is denominated in local currency.  The other 90 percent are denominated in foreign currency.  And so there is a possibility here to open up emerging markets in local currency to foreigners, helping countries manage their exchange rate risk better.

And finally, when we think about why things haven’t quite fully come together yet, despite a lot of interest, part of the reason is that indices that help fund managers benchmark their returns are only incipient.  At the moment, only 2 percent of emerging market local currency bonds are benchmarked and what is needed is a broader, inclusive, and transparent index.

So starting from these observation, here is the basic scheme that we have put on the table that our board approved on the 4th of October.  The IBRD, World Bank proper if you like, convenes and arranges a fund.  We have a request for proposals out for private fund managers where we hope that they will bid.  We had contacts with the market.  There seems to be a great deal of enthusiasm.  And we hope that in November possibly we will be able to see all the proposals and select a fund manager.

That fund manager would then go into the private markets and raise money.  We believe that it is realistic to assume that something like $5 billion can be raised for this.  And then the private fund manager would take that money, invest it in local currency bonds in emerging markets.  Most of these would be government local currency denominated bonds, but they would have an option of investing in sub-sovereign issues, corporate bonds and so on, for up to 30 percent of the total.  So that is one.

Then comes the question of how do you benchmark the performance of such a fund?  And what’s the index that they use?  Here, with the IFC and in cooperation with a private index provider, we are proposing to put together a new type of index which is basically driven by two considerations.  We start off by looking at the size of markets and the country weights would be a function of size of markets.  And then we adjust this by investability.

Investability comprises such things as what is the regulatory regime that facilitates the development of bond markets?  What is the tax regime that facilitates the development of bond markets, market access rules, et cetera?  And so some countries may have a larger market but investability may be limited.  And so their weight will get dragged down by that.  Others have promoted investability and their weight will consequently be dragged up.

So countries that either wish to get into the index would have an incentive to do something about investability, both for local and foreign investors, and countries that wish to have a greater weight in the index also can get there by doing something on the policy front and not just waiting for markets to develop.

Those countries that then have an incentive and actually want to do this and want to reform their markets, we offer technical assistance from the World Bank to help them in that process.  The technical assistance would be funded from the arrangement fee that we expect to get from the fund manager who will manage the $5 billion.

So that’s the package that has these three components.  They hang together.  We have the money.  The money is managed against the index.  If you want to be in the index and you want to get the money, you need to do something about your policy regime.  If you want to change your policy regime, we have the technical assistance to help, which will be funded by the management fee from the Fund.

So it’s a new concept.  We hope it’s a new bet.  We hope that the time is right to make this work.  In the words of some fund managers, they have said it has the potential to transform these local currency bonds from a speculative bet into a new asset class, helped along by the index.

You will see in the handouts that we’ll provide you that we have also, when you look back in the last 10 years or so, 15 years, at the performance of local currency markets, if there had been a better way of investing in them against indices, et cetera, these investments even have outperformed equity investments in emerging markets which have done quite well, as you know, in the longer term perspective.

So it is an attractive overall proposition and we hope to make this work.  We hope that the Fund will be put together by about the first quarter, second quarter of next calendar year.  We can talk about a variety of things in question and answer, such as the governance structure of this and more details, but I don’t want to bore you with too much detail at this point.  You have all of that in schematics and in the handout that is coming.

With that, I would pass on to Mr. Mohieldin for some perspectives from the government side on this.

MR. MOHIELDIN:  Good morning and thank you, Mr. Klein, for the presentation and for inviting me.

As a minister from a developing country with a market that has been described as emerging, I think the initiative is very much welcome.  We welcome that for many reasons. Some of the reasons were mentioned already by Mr. Klein, why you develop a local currency market based on some good values and ideas of long-termism.  It’s basically there for funding reasons, for benchmarking, for adequate portfolio management, for stability in the market that could suffer from short-termism, from hedging against possible negative developments and volatility, especially if you are going to be relying on foreign currency deliminated bonds.  And for many reasons today we see many of the institutional investors developing their own means and ways to invest but they lack really the long-term instruments to do that in the local markets.  And at the same time, they are prevented from depositing their funds abroad.  So they are just stuck in short-term assets or deposits or reinstate.

Why we are developing, as well, some activities in our markets in the developing world, like the mortgage finance market seeing funding through securitization.  Again, this requires benchmarking.  So for all of the common sense reasons, I think it’s a very welcome idea.

In the specific case of Egypt, and it represents many similar cases, especially the peer group of countries.  You see the development of the stock exchange, developing the market cap, during the last three years for instance in the case of Egypt, from 33 percent of GDP to more than 95 percent of GDP.  But where the value of the bonds on the fixed income is very insignificant.  In a good day, the trading really wouldn’t exceed 4 to 6 percent of the total trading.

So with this kind of initiative, with its three pillars, I think we can basically have some sort of a positive support to the domestic market and link it, as well, positively in the rest of the world.  It’s going to be providing an opportunity for the debt management, for the issuance program of the government, for the corporate bonds seeking funding, and indeed for some of the instruments that are being developed under securitization or other means of funding.

I’m very pleased that the funding is coming with matters that are not really less important but possibly equally important than the $5 billion, the technical assistance for the countries and the market that they’re going to be participating, as mentioned by Mr. Klein, the group could reach 40 countries and this could help the local efforts in developing the market and the development of the index as well, which is going to be a helpful tool in trading and a good guide for our work.

So we’re very pleased with the initiative and we’re very pleased to be part of the endeavor in its very first day.

Thank you so much.

MR. FAMILIAR:  Thank you, and thank you, Michael, for the invitation to be here.

Let me start by saying that I applaud GEMLOC for its ingenious approach to encouraging financial development through market-based initiatives.  This project demonstrates that the World Bank Group has a unique role to play in addressing market gaps, bringing public and private sectors together to meet the demands of both, and meeting the needs of middle income, as well as poor countries.

I see financial market development as a multi-dimensional problem.  Those charged with developing financial markets usually have to deal with regulation, market infrastructure, building capacity at the issuer side, attracting investors, fostering liquidity in the markets.  Some of these different issues are closely interrelated.  For example, liquidity and attracting investors.  It’s usually hard to attract investors if you don’t have liquidity in a market.  It’s hard to have liquidity if you don’t have investors.  You have sort of like a chicken and egg problem there.

And GEMLOC, in a way, deals with this problem also in a multi-dimensional way.  It has features to address the different aspects that come with market development, through the index, through the fund, through the technical assistance that is contemplated in the project.  It will definitely be very useful for countries willing to develop their domestic markets.

Also, I see that this project puts together markets of different sizes, of different degrees of development, and creates very good incentives, and in a way allows the smaller and maybe less developed markets to benefit from being a part of this larger group and will generate opportunities to grow and to develop.

I also see it as an excellent exercise in cooperation between the different organizations of the World Bank Group, the IBRD, the public sector arm of the group, the IFC, the private sector side.  And in a way, we are catering to our public and private sector clients, identifying their needs and creating appropriate incentives and benefiting both.  So overall, I think this is really an excellent project and I welcome it.

MR. KLEIN:  Thank you, and just let me say, Minister Mohieldin will have to leave for an urgent meeting in a few minutes, but we can start and continue with the discussion.

MS. PANG:  Great.  Thank you to our three speakers.  On that basis, if anyone has a question for Minister Mohieldin, we’ll take those first.  If you could please identify which organization you’re with and your name, that will be great.

So any questions from the floor, please?

QUESTION:  Can I ask it in Arabic, please?

MR. MOHIELDIN:  Sure.

QUESTION:  [Speaking in Arabic].

MR. MOHIELDIN:  [Speaking in Arabic].

MS. PANG:  Could we repeat the question in English?

MR. MOHIELDIN:  Do you like to repeat the question in English?

MS. PANG:  Perhaps you could just summarize the question in English.

MR. MOHIELDIN:  Basically, the question is about the size of the fund.  Is it going to be sufficient for help and support for developing countries?  And the critical date that was mentioned in November as a reference to that.  So the question is basically about the seriousness of the whole effort and is it going to be useful or not?

I’ll answer in Arabic, as requested.

[Continuing in Arabic].

MS. PANG:  Would you mind just summarizing the response in English, in case anyone is interested?

MR. MOHIELDIN:  Well, the response in English, was a positive response.  I was just saying that the value may sound, in today’s market, as a small amount but we are considering it as seed money that would guide other investment funds to follow suit and to have the issuance by governments and by corporations guided by it.  That’s why we are talking not just about the $5 billion but what comes of the rest of the pillars, namely the technical assistance and the index and the benchmarking activity that could be guiding it.

About the seriousness of the project, yes, it’s serious.  The money is there and November is not very far away, so we can basically have the activity starting by then.

Possibly Michael would like to add to this, especially about the credibility of the seriousness.

MR. KLEIN:  A billion here and a billion there, and soon you’re talking real money.

There is always this question overall we’re talking about trillions of dollars floating around in a world investing bond markets of all sizes and types.  But $5 billion is not an unsubstantial amount of money, and so it’s much larger than any individual operation, for example, that the World Bank Group otherwise puts together.  And so the number has been developed in consultation with market participants who feel that this is a reasonable amount that can be raised by about March of next year, presuming that we get our act together on the appointment of the fund manager in November, which is well on its way at the moment.

And it’s not small cash for a number of countries and bond markets, so we hope that this will be an interesting incentive for countries to develop their markets.

MS. PANG:  Thank you, any other questions?  Yes, please, in the black jacket.

QUESTION:  I want to ask Mr. Klein and Mr. Familiar.  I am Alicia Salgado from Mexico City, [inaudible].

For example, in markets like Mexican markets who have developed a local bond market that is just now matured from one month to 30 years in the curve and so on, and has liquidity, which one would be the purpose of this?  How could it help, for example, while we are just putting the local--well, the Mexican local bonds are putting JPMorgan bond index, emerging market bond index, and Merrill Lynch emerging market index, and whatever body index in Morgan Stanley.

So why another fund like this?

MR. KLEIN:  I’ll leave it to Jorge to talk a little bit more about the relations with Mexico in detail.  The general principle that we talked about is as follows: there are, as you’ve just pointed out, Mexico has pretty much the  most developed bond market in the emerging markets these days.  And there are some such markets which, by themselves--if the world was like Mexico, we wouldn’t have come up with this thing.

So when you want to get investors more into emerging markets, you need a little bit of diversification.  And the way we have conceived of this is we are proposing to say there’s about a dozen markets that are already investable, like the Mexican market, which one would want to include in any index, in any diversified portfolio that people want to go into.  And it helps diversification, it helps give volume for a fund, et cetera.

And then on top of that, we want to spread this and get investors to go into other markets where still a number of policy measures will have to be taken that Mexico has already taken.  And here the specific feature of the index that comes in is the investability criteria.  In the IFC, in previous years--I don’t know, Jyrki [Koskelo], when did it start?  The bond market, the equity index that was developed by the IFC?  Was it in the ‘80s?  In the ‘80s, et cetera.  It was an index contrary to the other market index that emphasizes country weights by investability, meaning the policy measures and regulatory measures the countries take to make it possible to invest.

There were always two philosophies around an index management.  One is to say let’s go for the size and have country weights just by the current size or the outcome of past decisions guide the weights.  And then there’s another philosophy that says let us have the country weights also driven by the policy efforts that countries make, as characterized by the investability index.  And the experience from the past with the equity index has been that that is what really was attractive to guide investors’ decisions because, as a general proposition, when you go into countries that make new reforms, that open up markets, et cetera, that’s where the interesting upside is.  And that’s where you can make a lot more money.

And so having that type of an index come into the market and having an index that is free of conflict of interest, with trading interest, et cetera--which we will provide--we hope that that can provide a real takeoff for a new asset class.  That’s, at least, also the feedback from fund managers.

So Mexico would benefit, hopefully, in the sense that additional interest for Mexico might be there.  But Mexico is not the prime beneficiary of this market.

MR. FAMILIAR:  I have very little to add, really, because I see it exactly the same way.  You mentioned several indexes that consider the Mexican market as part of them.  In general, it’s good to be part of those indexes.  It will be good to be part of this index, too, because this index will be used for benchmarking purposes and therefore it’s good that the Mexican market is there.

In a way, there is also a benefit for smaller markets of having markets such as the Mexican market being a part of this index.  You will make it, in a way, easier to investors to go into these smaller and less developed markets if the index contemplates also the larger and more developed markets.

So I also see it almost as a South-South cooperation issue.

MS. PANG:  Thank you.  Front row, please.

QUESTION:  Thank you, Professor, for a very interesting presentation.  I’m John Brown from Moneyline.com.

Mr. Klein, you mentioned the shifting of risk.  And I wondered if you could say one or two words about from where you see the fundamental risk moving from, and to what?  Particularly with regard to default risk, and secondly market risk, marketability, liquidity risk?  Is it envisaged, for instance, that the World Bank, through its agencies, would be a liquidity provision?  A dealer of last resort?

And secondly, from a default point of view, would it be a lender of last resort?

MR. KLEIN:  One of the features of this approach is that neither the World Bank nor the IFC would actually invest or stand behind this with any kind of either liquidity or credit guarantees.  So the issue here is simply to develop a--that the fundamental purpose is policy development, to provide both an incentive and help for countries who wish to improve their bond markets.  And to do so in this package.

But we will not stand and do not intend to stand behind this in any financial way other than that.

MS. PANG:  Thank you.  Yes, please.

QUESTION:  [Inaudible].

MS. PANG:  We can hear you, but there is a microphone in your seat.

QUESTION:  Anthony Rowley, Emerging Markets.

I wonder how large you think this asset class might eventually become and where the most potential for developing bond markets lies, as between Asia, Latin America, Middle East, and so on?

On the investability issue, what are the main barriers to investability?  Are they foreign exchange barriers, taxation, or what?

Part from--as I understand it, you are offering technical assistance to countries to improve their environment.  But is the possibility of the availability of the money itself meant to be a major inducement for them to make reforms in their bond markets?

I do have other questions, but I’ll stop with those for the moment.

MR. KLEIN:  let me start with the last one first and then take to the other ones.

Just because a $5 billion fund, however large that might be, is out there, I don’t think will drive policy development in and of itself.  The desire to develop local currency denominated bond markets is something that we observe in a lot of countries.  We think the time is ripe for an initiative like that.  This is not just because the money is dangling there that people will do this.  This is a wish that we have heard from many clients, be it Mexico where already developments have happened, be it Egypt where a lot of work is underway, or the other countries that are involved.

And so the money may give a slight extra push in some cases and may give officials who wish to promote the bond markets an extra argument to proceed with this, and the technical assistance may help that whole thing along.  But the fundamental bet is on the time being right for a push on development of local currency bond markets.

How large will they eventually be?  And where will they be?  I will ask Oliver, how large will they be, Oliver?  This is trillions we’re talking, I would have thought.

MR. FRATZSCHER:  Today we have about $4 trillion in market cap in all emerging market debt, external and domestic.  About $1 trillion is really investable.  The rest is really hard to put away in reserve requirements.  Of that $1 trillion, as we mentioned in the beginning, $700 billion is local currency debt right now.  So $5 billion is a small piece for that.  But being a catalyst is very helpful to bring global money into this market and also to allow emerging markets to diversify the reserve holdings South-South within a pool of emerging markets bonds.  That’s most helpful.

MR. KLEIN:  Now let me take a stab at this is the current situation, and you asked for the future, what kind of dimensions are we talking about?  I would have thought that, what is it, institutionally invested money in the world today is what, on the order of $55 trillion total?  So driven very much by the development of social security systems, pension systems, insurance systems, et cetera.  This is argued elsewhere probably one of the major trends in financial markets for the coming time, particularly aging populations.

Two things play together in emerging markets.  Number one, as you knows, since about the year--not since about but since the year 2005, emerging markets valued in purchasing power parity exchange rates have reached the same size as the rest of the world.  At the same time, aging processes are advancing very rapidly in emerging markets, faster in many ways than they have historically.  And China, for example is about 20 years behind Japan in aging, meaning that before 2020 the actual labor force might start shrinking in China.

And so the incentives there for to develop pension systems, insurance systems, other institutional money systems in emerging markets are growing very rapidly.  The size of these markets is growing very rapidly.  And I would have thought that therefore, if the world has now $55 trillion of investment, of which $4 trillion sit in emerging markets, that balance is going to shift rapidly.  And we’re talking about adding probably tens of trillions over the next 20 to 30 years to this in emerging markets.

So that’s a wild guess.  But anyway, an order of magnitude for what we’re talking about here.

Last, what are the barriers?  Can we characterize the barriers in emerging markets?  I think this varies a lot from country to country.  In some cases, it is tax features.  In some cases it’s regulatory or approval procedures, documentation requirements, et cetera.  And in some countries, it’s access regulation.

QUESTION:  [Requesting repetition of the last sentence].

MR. KLEIN:  Access regulation, being able to enter a market for certain classes of investor.

MS. PANG:  Yes, please, at the back there.

QUESTION:  I am [inaudible] Suliman [phonetic] from Lanka Business Online.

Sri Lanka raised about $460 million in local currency [inaudible] bonds in April. Can you give me a sense of when you start this fund where we might be in the--what kind of volumes are in the index?  Where we can expect where it’s still a small country?

MR. KLEIN:  I think I would not want to comment on volumes or how much might float in Sri Lanka or the policy environment in Sri Lanka.  We needed to leave it to the private fund managers to make those decisions.  We will create an index, together with IFC and the private index provider, which will be very transparent where you can see exactly what the index does, what it says, what the investability criteria area.  And that will then give participants in the markets and observers an idea of what might be expected.  But I’d rather not comment on volumes.

MS. PANG:  Chris, please.

QUESTION:  Christopher Swann from Bloomberg News.

I had a basic question is why did emerging market equity markets take off but bond markets or local currency bond markets didn’t or haven’t yet?

MR. KLEIN:  Oliver, take a crack at it.

MR. FRATZSCHER:  It’s a very interesting question, why it took 20 years longer to have the first broad index for emerging markets for the currency debt than we had for equity markets.  Pretty interesting.

I think there are at least three or four obstacles that still have not been resolved.  If you look at the major markets, India and China, right now you have massive foreign direct investment in the equity sector.  And still both markets are not allowing foreign investors to invest in local currency bonds, which is very strange.

The perception is that equity capital is more developmentally helpful than bond market capital.  And I have some questions about that, and the result we’ve seen is that these markets attract a lot of hot money, derivative money in [inaudible] often three to six months from off-shore centers, in these cases Mauritius and Singapore that go in and out of the country and don’t do anything for development.  And we really want to help bring these short-term hot money flows into onshore longer-term stable investments from institutional investors--be it official or private.  And I think that’s one of the main reasons why this hasn’t taken off.

And the second point is taxation is often prohibitively high.  There’s at least a handful of countries with 30 or 40 percent withholding taxes on bond investments.  And that is putting the yields lower than U.S. Treasuries, so not point in going in there.

And thirdly, I think emerging market reserve managers haven’t really pushed hard, except for the Asian bond fund, to create an asset class to diversify their holdings out of U.S. dollar and G-3 currencies into emerging market currencies, which is now just happening.  And we are really supporting that effort.

But I just started.  Michael, you may have more things to say.

MR. KLEIN:  Yes.  I don’t know what the final answer is on this.  My perception is in the ‘60s, ‘70s, what you saw was a build up of bank-based debt for emerging markets which then gave rise to or exploded in the Mexico crisis, ‘82 in the other Latin American defaults that were there at the time.

At the time, then there was a reorientation from countries towards the nice risk-sharing properties of equity.  I certainly remember at the time people saying if you go into equity, then the risk is much more shifted towards private investors, much more flexible, et cetera.  And you didn’t have the development of bond markets worldwide at that time.

And so we now have a confluence of more mature markets in various places of bond market and capital market development, and now an interest in this asset class.

Whether this potted history captures all of the relevant features, I’m not quit sure.  That’s just where my mind is on this.

MS. PANG:  I’m sorry.  We’ll go to the center there and then back to you, Anthony.

QUESTION:  John Hougue [phonetic], Interamerican Development Bank.  A question for Mr. Klein.

We appreciate and applaud what you’re doing.  I believe I read that the maturities are going to be in the three to five year range, and obviously for countries such as Mexico or Brazil that offers less advantage than maybe others.  What is the chance that that could lengthen over time?  Obviously you lose your chance at the benchmark if you’re trying to benchmark against three to five elsewhere in the market.  But it would certainly be more developmentally effective and helpful.

MR. KLEIN:  Yes, that’s certainly the intent, to have it lengthen.

Any particular--Oliver, any comment?

MR. FRATZSCHER:  Just to respond on that technically, the index rules make a provision that all bonds in issuance size $100 million and up will be included in the index.  Meaning if a country has mostly short term issuance, we would try to have the ones in the [inaudible].  In the case of Mexico, I think we can go with sevens and 10, as well.

The case of Mexico is very interesting, as well.  We talked with the local brokers and banks in Mexico and they tell us it’s a very inefficient market, lots of arbitrage.  There’s really not a single fixed income index for local currency bonds in Mexico.  It would be the first index in that country.  And then the first exchange would fund against that, which would really help put longer dated government bonds in much liquidity out there and set these incentives for governments to issue in larger volumes in these longer durations.  So we are moving up that country by country as we go along.

MS. PANG:  Thank you.  And just to introduce our impromptu spokesperson, it’s Oliver Fratzscher, who’s Project Manager for GEMLOC.  So he’d be happy to hand out his card later, if you need his details.

Anthony, please?

QUESTION:  Actually, one fact you didn’t mention in answer to a previous question is that back in the 1980s the IFC, of course, was very instrumental in pushing the development of equity markets and did, in fact, launch, I think, the first emerging markets equity fund, under David Gill, which I think probably had some considerable impact on the market.

But my question is banking systems are obviously very strong in all of the countries that you’re targeting.  How do they view the efforts, do you think, to improve the bond markets, which to some extent will disintermediate the banks?  Are they on side with this initiative?  Or do they regard it as a sort of competitive threat, do you think?

MR. KLEIN:  I would have thought yes.  I don’t have a very good answer to that.  I would have thought that from the government point of view, we see a lot of interest all over to develop bond markets.  Then, depending on the structure of financial institutions in various countries, as you know, many countries allow banks or financial institutions to do various things, not only do banking business but also do capital market operations, et cetera.  So there may be many people who feel that this is actually adding to the menu of products that they offer, rather than just being a competitor to the institution as a whole.

I don’t have any deep thoughts on this.

MR. FAMILIAR:  Let me sort of go to my previous life as a regulator and supervisor of the securities market in Mexico.  When we have initiatives like this one, you basically have institutions that fell under one of two scenarios.  Some institutions were looking at the very short term and they saw these issues as--things like this as competition.  And others were looking to the longer term.  And those always saw the issue as if we have a larger cake, we are going to be able to have a larger share of it.

So I guess that, given the globalization of the banking sectors and all of that, I think that the prevailing view should at least be one of longer-term and of benefit for all financial institutions.

MR. KLEIN:  There is a minor wrinkle at the moment that a lot of people are rethinking the relationship between banks and capital markets based on recent histories and what seems to be in the capital markets, how it can come back to the bank markets and how banks and capital markets interact and conduct business together or separately, et cetera.

So I think--again, I don’t want to predict where this ends up.  But I think we will see overall--I’m personally convinced that what we will really see is the development of a lot of long-term capital market instruments driven by demographics and rising wealth overall.  That’s a real given.  And then how the financial systems cope with that in detail, I think there again we will see that banks and capital markets are not too distinct at the end of the day, that there are lots of interrelationships, and that is a matter of understanding the broad market a bit, like Jorge said, and not narrowing looking at one instrument as driving out another one.

But that’s my personal speculation rather than a researched view.

MS. PANG:  I think we have time for one more question, so we’ll move to the back.  Thank you.

QUESTION:  Walter Brandemart [phonetic] from Reuters.

Two questions, actually.  First, have you been talking to all the governments of those countries who are involved in the initiative?  And what feedback you’ve been getting from them?

And the second one is which countries do you expect to benefit the most?

MR. KLEIN:  You will see on the handout a list on page seven, a list of--an indicative list of countries that we hope over the next few years would become part of the index and part of the investor of the countries where the Fund would invest.  And so we’ve had a number of conversations with governments and we had a very intensive round again at this annual meeting here, which is a very efficient way of introducing the concept and checking it out.

So there has been a steady stream of requests from these countries that gave rise to the idea, and then a check back now in more detail.  Again, Oliver just, before this meeting, came from one of such meetings.  Any new insights from that?

MR. FRATZSCHER:  Well, we’ve met with about 15 to 20 delegations in these meetings and the response has been very, very positive.  And we hope to engage at the senior levels later this year and we hope to start the fund in early 2008, meaning also starting the index and starting to provide technical assistance at that point to make countries more investable and get better benefits from this fund.

But as you say, we hope to start with 15 to 20 countries next year and the move it up to 40 countries over the next five years.

MR. KLEIN:  This is sort of one take on this, which at least in my mind, at some level this is motherhood and apple pie and a lot of countries just want to develop their bond markets.  And then you ask yourself if it’s motherhood and apple pie, why is it not happening easier and faster and by itself, et cetera.  And then you go into these itsy-bitsy little regulatory and tax issues that are there.  And every regulation has a constituency and every tax change has some pain and sort of cumulative pain and difficulty of sorting through all of that can actually slow things down.  And giving that a little push is what we hoped to do here.

And then there’s one particular policy concern that is always--that is there from time to time, and that is to the extent the fund would require opening up of the capital account controls in some countries or a weakening of capital controls, that then has macroeconomic dimensions.  And some of the central banks may be wary of this.

And this goes back, one of you mentioned, the IFC 20 years ago came up with--was it Korea?  Was it the equity funds?

And at the time--and the people actually who came up with the idea of GEMLOC had also been involved with this stuff in the early days.  And one aspect was the Koreans at the time would say okay, we need to move from that towards equity to get better risk-sharing properties.  But we want to be careful.  We want to have a toe in the water approach and open a window in our capital controls through which people can come in and out and see how that works.  And that was the underlying philosophy of that particular approach by the IFC at the time.

And here again this fund, for those people who would like to pursue such an approach for domestic local currency markets, can take it with this one.  It provides a toe in the water approach, which helps you bring--like Oliver said--what is now traded offshore in Mauritius or Singapore or wherever onshore into the country, into the ambit of the regulatory regime of the country, away from derivative markets to cash markets in the country, and thereby getting hopefully a better domestic development underway, rather than just providing foreigners with the option of trading off local currencies in other markets.

So this conglomeration of issues surrounds this.

QUESTION:  [Request for Mr Klein to address the final part of the question about which countries would benefit most].

MR. KLEIN:  Which countries would benefit the most?

In a generic sense, I would have hoped that at one end of the spectrums there are the Mexicos with highly developed markets.  Two arguments have been made why they would benefit from being in an index.  That develops getting greater shares, greater attractiveness, tighter spreads in the market, et cetera.  And also, within Mexico, index development, as has been pointed out, might develop that market further.

And then, on the other end of spectrum, there are those markets that have just really fledgling bond markets.  I’m not going to give a list of who benefits most, but the Sri Lanka example that has been mentioned points to one.  There is a fledgling market there where a lot more could happen.  And so you’ll have just a spectrum there.

MS. PANG:  We have five minutes, so we’ll just take this final question in the front row.

QUESTION:  Thank you very much.  I have a fairly brief second question on the legality of the bond issues.  In other words, of the indenture behind the bonds.  Is it envisaged that it will, in common with most of the international bonds, have either English law or New York law governing law?  Or will it be local law governing?

MR. KLEIN:  International.

MS. PANG:  Wonderful.

Thank you.  I’d like to thank our speakers again, Mr. Klein and Mr. Familiar.  And thank you all for joining us today and participating with such interesting questions.

If you have any follow up questions, please do call myself or Corrie, who are listed on the press release.

Thank you very much.

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