EU backs new TCX hedge facility to cut cost of €2bn of local currency loans

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EU backs new TCX hedge facility to cut cost of €2bn of local currency loans

Ruurd Brouwer

The European Commission and DFIs are backing a €150m guarantee fund to make swaps cheaper

A new hedging facility has been set up to make cross-currency swaps cheaper for development lending. The aim is to enable more loans to be made in emerging and frontier markets’ own currencies, and at longer tenors.

The up to €150m hedge guarantee facility, run by the Currency Exchange Fund (TCX) and supported by the European Commission and EDFI Management Co, was launched on Monday, with the title of EU Market Creation Facility — Pricing Component Plus. EDFI is the Association of European Development Finance Institutions.

Being able to borrow in their own currency is helpful to many borrowers, as they do not face foreign exchange risk. However, development lenders do not want this risk either. Finding counterparties willing to provide swaps between dollars and smaller, volatile currencies at a reasonable cost is hard.

TCX was set up in 2007 by a group of DFIs to act as a non-commercial swap counterparty for currency risks that commercial banks would not handle cost-effectively. It has $1.55bn of available capital and carries $8.4bn of derivatives, with $3.2bn of net exposure, as of the end of 2024.

“The core purpose [of this guarantee facility] is to make transactions happen that wouldn’t have otherwise happened because of local currency pricing,” said Ruurd Brouwer, CEO of TCX in Amsterdam (pictured). “The presence of this guarantee allows us to offer significantly lower local currency rates.”

The €150m is new money from the EC and EDFI Management which can protect TCX against losses it suffers.

The new facility should “support about €2bn of [local currency] transactions,” Brouwer said, “making it by far the largest blended facility ever. There have been a couple of other big ones, but those were dedicated to a single multilateral. This is open to all.”

The new scheme follows a €20m pilot programme, closed in 2024, that supported €120m of loans. Unlike the pilot, this facility is open to a wider range of countries, covering lending to Asia Pacific, the European neighbourhood, the Middle East, sub-Saharan Africa and the western Balkans. The pilot scheme only covered Africa and the Middle East.

Under the guarantee agreement, when a loan made by a DFI or commercial bank matures, if there is a loss in the hedge, TCX can deduct this from funds backing the guarantee, instead of covering it with its own resources.

“Under the pilot programme, we offered a discount of 2%-5% on the dollar leg,” Brouwer said. “It’s substantial if you can get a 5% reduction on the interest rate.”

Brouwer believes this will be particularly useful for loans made in frontier currencies or at longer tenors, where the cost is typically higher.

As a result of the savings available, “there was huge interest in the facility even before it was launched,” Brouwer said. “When it was still being negotiated, we heard from several potential investors who couldn’t get projects off the ground because they couldn’t take on the FX risk. We know there is already a reservoir of transactions waiting for this facility to go live.”

Unlike other hedging guarantees, the costs are deducted only when the loan matures, meaning funds are not used upfront. Because of this, if the hard currency depreciates against the EM one, the funds might not need to be used.

“If you look at 2025, there is a sub-portfolio of trades maturing this year [signed under the pilot programme three to four years ago] that we expect to draw nothing for because the dollar has weakened,” Brouwer said. “Without the presence of this guarantee, these transactions would never have happened.

“We won’t be using the full €20m reserved,” said Brouwer. “The bottom line is: we created a huge subsidy out of thin air.”

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