This note presents and discusses the arguments offered by several sovereigns that have joined a trend starting in 2013 whereby issuers, both sovereigns and corporates and in particular in Latin America, have gradually replaced a portion of the funding raised in USD for EUR. The trend seems to respond to the divergent monetary policies followed by the Federal Reserve and the European Central Bank and the expectation that this divergence will keep nominal coupons for bonds denominated in EUR well below those of USD bonds. The perception that funding in EUR is cheaper is complemented, in many cases, by the expectation of further strengthening of the USD.

The selected country cases reported in this note state both strategic and tactical arguments for increasing their issuance in EUR. The strategic reasons relate to internal currency benchmarks, which indicate that there was room for replacing some of the borrowings in USD for borrowing in EUR. In some cases, the currency substitution is supported by the argument that further diversification in the investor base was needed as the investor base for EUR-denominated debt does not significantly overlap with that of obligations in USD. This argument was reinforced by the relatively tight conditions in the USD market that made placement more difficult for many issuers in the last few years. Tactical arguments refer to the need to open a market to a private sector also wanting to raise funding in EUR, or, to the need to access new investors as a preliminary step to attract them to domestic market securities. Several countries also admit that the optical effect of lower coupons was a relevant consideration.

This note highlights the importance that sovereigns avoid making decisions by comparing the nominal coupons in both currencies, which is tantamount to comparing apples with oranges. More important, a formal debt management strategy, including a target for the currency composition for the FX portfolio, should guide the debt managers. Without such a target currency composition, the debt manager cannot tell whether the issuance in a particular currency - USD or EUR in this case - is reducing or increasing the exposure of the debt portfolio to foreign currency risk and helping or not to achieve his debt management objectives.