...Risks of Sudden Debt Increases: Local and regional governments (LRGs) with unhedged borrowing in foreign currency face the risk the debt stock and debt servicing may increase if the domestic currency is devalued or depreciates. Most LRGs' revenues are in domestic currency, apart from where they benefit from foreign-currency royalties, which act as a natural hedge. Attractions Are Strong: LRGs are drawn to foreign-currency borrowing when it is cheaper than domestic currency because of lower interest rates, or when longer maturities than in local currency are available. It also widens the funding base and can enable access to some multilateral lending institutions, such as the European Investment Bank (EIB), that only lend in selected currencies. Hedging Potentially Inaccessible: Hedging may not be available for some emerging markets and currencies, or limited, because financial institutions may not wish to take exposure in a particular country or currency, or the local market may lack the...
