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Currency Insurance Could See a Rise As Political Risks Increase

Source: WSJ - Chana Schoenberger

Posted on 01 Jul 2011

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Should the political situation get chaotic in fast-emerging markets, foreign money being poured into these countries might have trouble getting back out. To guard against this, companies often consider a type of political-risk insurance that protects against governmental exchange-rate barriers.

Such "currency inconvertibility insurance" could regain popularity as companies worry about emerging markets imposing foreign-exchange controls, Edith P. Quintrell, director of operations for the World Bank's Multilateral Investment Guarantee Agency, said in an interview.

Banks and businesses often buy currency-inconvertibility coverage to guarantee that a project they are funding in an emerging country—say, an oil discovery, a factory, a real-estate development—will continue to pay back its loans in the agreed-upon currency. The policies don't cover devaluation.

In the fallout from the world-wide financial crisis, "investors are more concerned about political risk," said Ms. Quintrell, whose Washington, D.C.-based agency, known as MIGA, is on the hook for $9 billion in overall political-risk insurance coverage, which goes beyond currency risk. That's a record amount for MIGA, in part because of the heightened awareness, she said.

"Some economies are getting overheated, which can raise concerns for investors and increase political risks going forward," she said.

In the late 1990s, currency-inconvertibility coverage was losing popularity. The biggest economies had moved from fixed to floating exchange rates, and their developing counterparts seemed to be following suit. Then, in 2002, when Argentina's economy tanked, the country forcibly moved all dollar obligations into the peso and blocked hard-currency outflows—except for payments insured by MIGA.

MIGA and similar government agencies around the world can handle about $500 million in coverage for asset expropriation, of which currency-transfer risk is a subset, and the private insurance markets can do an additional $1.5 billion, says Evan Freely, global leader for trade credit and political risk at Marsh Inc., one of the handful of insurers that offers this coverage.

Currency claims typically top out at $800 million per risk, he says. While MIGA has never paid a currency-transfer claim, private insurers have, although details are confidential.

Investors now are skittish about doing business in the Middle East.

MIGA isn't raising its rates there after a rash of regime changes this year and is looking to insure projects in Tunisia and Egypt, Ms. Quintrell said. "We feel it's our role to try to support investments in the Middle East now."

The sovereign-debt drama in the euro zone has reminded the markets that exchange controls do happen, although the euro itself is too liquid to be at risk for government restrictions, she said.