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Derivatives

Peru Shops For FX Protection

The Ministry of Finance and Economy of Peru is holding talks with bankers about using foreign exchange swaps and cross-currency interest-rate swaps for the first time to hedge its currency exposure on euro-denominated loans. It will use the swaps to convert euro-denominated debt into synthetic dollar denominated liabilities, according to Emerging Markets Week, aDW sister publication. Peru has USD5.8 billion, in euro-denominated debt. The remainding USD13.1 billion is denominated in dollars and yen.

"We want to cover ourselves against any more appreciation of the euro [against the dollar]," said Fernando Lituma, head of the public credit department in Lima. It hedges its exposure into dollars because its export receipts are in dollars. "A greater euro appreciation will really hurt us through our euro-debt holdings," said Lituma. Ministry officials are putting together a survey that would quantify how much more Peru owes on its EUR6.2 billion (USD5.6 billion) in debt outstanding given the recent euro appreciation relative to the dollar. No preliminary figures were available. Foreign exchange strategists expect further dollar weakening against the euro. Lituma declined to comment on potential counterparties.

Lituma said the amount of debt the swap would cover has not yet been finalized. Ministry officials said they plan to hire a bank for this transaction before year-end.

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