The Inter-American Development Bank has struck a deal with The Currency Exchange (TCX) - a new hedge fund created by Dutch development financier FMO, through which it plans to swap up to US$100 million for currencies in issue across Caribbean and Latin American.

The swapped funds will then be made available for lending to regional companies in their home currency.

FMO, along with a group of European aid agencies, multilateral financial institutions, pension funds and private banks created TCX last year as a vehicle for currency hedging services in developing countries.

Under the deal struck between them, IDB will guarantee up to US$100 million in TCX in the form of a "subordinated, non-convertible loan".

own currency loans

The bank said it would use TCX's services to swap its funds for up to US$600 million of LAC currencies, which would then be made available for lending.

"The deal with TCX allows us to take a new approach to increasing the availability of flexible lending denominated in our borrowing member countries' own currencies," said IDB project team leader Ira Kaylin, in a bank release on the deal.

"This is particularly important for clients in countries where currency swaps are not yet feasible."

TCX, as the counterparty to the swap, essentially assumes the foreign exchange risk that a company would have incurred in the event of a decline in value of the local currency against the US dollar.

"In turn, TCX spreads its own risks by investing in a globally diversified portfolio of currencies and interest rates," said the IDB.

The bank also said it plans to sell US$2.5 million of the TCX loan to its affiliate, the Inter-American Investment Corporation (IIC), for lending to small and medium-size enterprises in the region.

business@gleanerjm.com

TAKEN FROM THE FINANCIAL GLEANER, FRIDAY, FEBRUARY 1, 2008.