IV Development of Constructive Relationships Between the Fund, Member Countries, and Commercial Banks
- Paul Mentré
- Published Date:
- April 1984
Exchange of Information
An effective working of the marketplace relies on adequate information. In an ideal world, banks would have detailed and timely information on the external debt and the economic situation and policies in borrowing countries and thus be able constantly to revise their assessment of those countries, sending them “signals” through a widening of spreads, a shortening of maturities, or in other ways. Those who advocate the usefulness of “private conditionally” believe that market signals are likely to induce the required adjustments in borrowing countries and to pave the way for a new phase of expanded lending when economic indicators point to the success of the adjustment program. In reality, the world is more complex. There are “noises” in the statistical system, making it difficult to discriminate between overall and specific country trends. Also, competition between bankers leads to alternating phases of overlending and abrupt cuts, and regional contagion plays an increasing role.
The Fund has a unique capacity to collect information from member countries, and the commercial banks constantly strive to obtain this information from the Fund. Obtaining information direct from the country is an obvious first step, but banks are also eager to develop direct access to Fund information and judgments. Such a sharing of the Fund’s information would, however, impair the confidential nature of the Fund’s relationship with its member countries and could harm the quality of the information supplied to the Fund. It was for these reasons that such an approach was rejected by the Fund in 1975, and the reasoning behind this decision is still valid today.
Times have changed, however, and in view of the difficulties that borrowing countries have encountered in raising funds on the capital markets, they are showing a growing willingness to accept or encourage direct contact between the Fund and the commercial banks. In addition, the Fund has felt the need in several instances to obtain through direct contacts with bankers a considered view on relations with suppliers and creditors and/or likely capital flows for individual countries. Thus, direct contacts have been made with lead bankers for certain countries, meetings have been held in creditor countries’ central banks with a group of bankers to discuss regional situations, and Fund staff members have participated in seminars or ad hoc meetings of commercial banks. These closer contacts have been welcomed by commercial banks, which would like to see them established on a more regular basis. For example, the Fund could make presentations on the situation in some regions to commercial bankers in various European and Asian financial centers. There could be, periodically, meetings with small banks, for instance, in U.S. reserve money centers outside New York, or meetings with leading commercial banks in a given country at the time of a consultation mission, or meetings with a group of 30–40 potential lead managers under the aegis of the Institute of International Finance, described below. General Fund publications such as the reports on international capital markets and external indebtedness of developing countries are of interest to commercial bankers, but these could be supplemented by more detailed publications dealing with related developments in different regions of the world.
Informal contacts between the Fund and commercial banks are diverse. Some of them involve country specialists, others involve capital market specialists, and still others are made at the level of heads of department or the Managing Director. Consideration could now be given to the possibility of evolving from these informal, ad hoc contacts a more systematic internal procedure, in agreement with the member countries involved.
The commercial banks have a corresponding desire to streamline procedures to improve the handling of information and the management of crises by the banking community. The Group of Thirty’s International Banking Study Group suggested the creation of a liaison body in which leading commercial bankers, supervisors, central bankers, and officials of international organizations would be represented. The main functions would be to gather information, notably on individual bank exposure in individual countries.43 The information would be kept confidential but would be at hand if needed in a crisis. The liaison body would be able to act quickly to set up steering committees of banks and would know from the beginning the magnitude of the claims of the various banks involved. This initiative was, to some extent, distrusted by commercial bankers, who were afraid to see their responsibilities diluted within a body they would not fully control, and has been watered down to periodic meetings of the Study Group to exchange information among participants with diverse backgrounds and perspectives, in itself a useful development.
As regards policy-oriented coordination among bankers, the initiative has been taken by another group, initially the Ditchley Park Group, which consisted of leading international banks in the United States, the United Kingdom, Japan, Canada, the Federal Republic of Germany, France, Switzerland, and the Netherlands. After two preparatory meetings in 1982, they created on January 11, 1983 the Institute of International Finance, located in Washington. Membership in the Institute is open to all banks all over the world with an international exposure, although votes are weighted according to relative transborder exposure. The Institute’s mandate is to collect information on borrowing countries and develop contacts with the Fund and the World Bank.44 It might also conduct periodic country reviews, which would not be a substitute for but would complement the country risk assessments by individual banks. This initiative could contribute to better-informed attitudes of bankers to individual countries, structure the dialogue between borrowing countries and international banks, and reassure small banks that are now a vital part of the international bank lending process.
Complementarity in Lending
As pointed out in a paper published by the Fund,45 there have been large swings in bank lending. The ratio of net bank flows to current account receipts for 1973–79 for six countries that experienced debt-servicing difficulties was in the range of 10 percent to 26 percent for the three-year period of peak inflow (1973–76) and in a range of minus 9 percent to plus 1 percent for the succeeding three years.46 These uneven flows are clearly unwelcome, since rapid increases in bank financing tend to be associated with unduly expansionary domestic policies, declining domestic savings rates, overambitious investment strategies, and delays in implementing the necessary adjustment. Moreover, the severity of adjustment after such delays and the time taken to restore creditworthiness to debtors harms the normal development pattern of the borrowing country. The Fund, in coordination with central banks and commercial banks, should therefore aim at smoothing this process through a better mix, over time, of adjustment and financing.
During a period of overlending, adequate information remains the best way to promote self-discipline in the marketplace, even if competition among banks reduces its impact. The Fund, in its consultation reports, could establish guidelines evaluating what it would consider to be adequate domestic policies or it could even agree with the country on conditions under which the Fund would stand ready to make its resources available (a “reverse stand-by arrangement”). The drawback to this approach, however, is that a deviation from the guidelines or absence of an agreement could result in an impairment of the borrowing capacity of a member country at a time when it was not using Fund resources. It would seem, therefore, that adequate exchange of information between member countries, commercial banks, and the Fund on prospective balance of payments requirements and capital flows would be a more realistic proposal.
During a period when a country needs to adjust, banks normally apply pressure on the country to seek approval of a program by the Fund. In such circumstances it is necessary that the country apply to the Fund early enough, since the in-depth discussions between the Fund staff and the country on the adjustment program, between the country and its creditors on debt service, and between the country, the World Bank, and donor countries on projected aid flows are necessarily lengthy, thus potentially aggravating the crisis. There is also a need to integrate bank lending flows more fully in Fund programs. In some stand-by arrangements in the past, the bank financing that was assumed to be available did not materialize. Hence, there is a need for a mutual assessment of required capital flows, an approach exemplified in the discussions between the Fund and commercial banks on Mexico and Brazil and some other major borrowing countries. During periods of adjustment, the complementarity in lending by the Fund and the commercial banks could take the form of an understanding on the exposure to be maintained by commercial banks, provided the country remained current on its interest payments and more formal assurances from commercial banks regarding their lending could be sought by members undertaking adjustment programs. As noted in a study by the Institute for International Economics, banks should be willing in such circumstances to extend new loans in order to shore up the quality of their outstanding loans.47
After an adjustment program has been successfully implemented, the Fund should help the country to regain access to financial markets and to help them seek a normal pattern of financing through bank lending. This might be achieved by the inclusion in Fund programs of adequate incentives to restore the borrowing capacity of individual domestic entities, especially the commercial banks; it also requires appropriate contacts with export credit agencies, governments, central banks, and commercial banks so as to speed up the process of restoring creditworthiness.
In a number of cases, a concerted approach to balance of payments financing and joint financing by commercial banks and the Fund have proved useful. There have already been cases in which short-term bridging facilities were granted by commercial banks to prefinance drawings on the Fund (e.g., Turkey) or in which medium-term bank facilities have been explicitly tied to the existence of Fund programs and even to the phasing of the use of Fund resources (e.g., Yugoslavia, Mexico, Brazil, and Argentina).48 Most projections over the next three years49 show that, under reasonably optimistic assumptions on OECD growth, interest rates, and terms of trade, debt problems could remain manageable, with an improvement in debt indicators, provided that debtor countries continue to adjust their economies. These projections also indicate that “involuntary lending” by commercial banks (i. e., an expansion by a given percentage of all bank exposures in a given country in the framework of an overall financial package including the Fund) may still be necessary in the coming years for certain countries. But that should not lead participants in such coordinated efforts to lose sight of the ultimate goal, which is resumption of decentralized capital flows. A medium-term assessment in a joint meeting, to be called at the initiative of the borrowing country and to include the Fund and the leading commercial banks, could in certain cases help to define collectively the timetable and the actions to be contemplated to achieve such a goal.
In present circumstances, it has been argued that the Fund should be ready to go further. Commercial banks provided about $25 billion in 1982 and about $15 billion in 1983 of financing for the current account deficits of the non-oil developing countries, against more than $50 billion in 1981.50 To stretch over a longer period the needed adjustments of borrowing countries to available financial flows, it has been suggested that the Fund could step in by way of innovative techniques, such as cofinancing agreements, and borrowing in the markets. In particular, a new conceptual framework has been suggested, under which banks would grant additional credits to a borrowing country and at the same time lend to the Fund a part of the resources it would make available to the same country in support of an adjustment program. But it has been stressed that such a move could impair the essence of the Fund, which is based on solidarity between governments, and would make it more vulnerable to the changing attitudes of commercial banks. It can therefore be argued that, through collective agreements by bankers to supply the major debtors (e.g., Brazil and Mexico) with bank credits consistent with borrowing requirements under Fund programs, through adequate restraint by other borrowers, and through continued bank lending to creditworthy countries, the present system is still fully able to meet the overall financing requirements, provided the Fund acts quickly and effectively when the need arises.