Abstract

This paper presents the annual survey of international capital market developments and prospects. It summarizes recent developments in capital market flows and asset prices, including the initial impact of the Middle East crisis, and reviews the main ongoing structural changes in financial markets. A sharp fall in net investment in foreign securities by Japanese institutions in 1990, in the face of narrowing interest rate differentials and, in some cases, the need to cover losses stemming from the fall in the Japanese stock market. In contrast, the importance of net direct investment outflows as a counterpart to the current account surplus began increasing as from 1989. The crisis in the Middle East resulted in a further tightening of market conditions, especially for less creditworthy borrowers. A general preference for safer and more liquid financial instruments was reflected in increased spreads between corporate and government securities on national markets and between private sector Eurobonds and government securities denominated in the same currency on international markets.

© 1991 International Monetary Fund

ISBN 1-55775-218-4

ISSN 0258-7440

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Contents

  • Preface

  • I. Overview of Developments and Key Issues

    • Financial Market Trends

      • Major Market Developments

      • Spontaneous Financing for Developing Countries

      • Recent Structural Changes in Financial Markets

    • Financial Policy Issues

      • “Financial Fragility”

      • Global Credit Pressures

      • Market Re-Entry of Developing Countries

    • Public Policy Response to Strains in the Financial System

    • Reassessing Official Safety Nets

    • Emphasizing Capital Strength

    • Supervising Financial Conglomerates

  • II. Recent Developments in International Capital Markets

    • Macroeconomic Environment

      • Impact of the Middle East Crisis

      • Market Conditions at the Beginning of the Crisis

      • Initial Asset Price Effects

      • Effects on Institutions and Markets

      • Impact of the Outbreak of Hostilities

    • Net International Capital Flows

      • United States

      • Japan

      • Germany

    • Gross International Financial Flows

    • Markets for Derivative Products

  • III. Recent Developments in the Regulation and Supervision of Financial Markets

    • International Capital Adequacy Standards

    • Capital Adequacy Requirements for Market Risks Assumed by Banks

    • Issues in Monitoring Large Credit Exposures

    • Supervision of Financial Conglomerates

    • Recent Initiatives Against Money Laundering

  • IV. Key Issues in Official Safety Nets and International Financial Markets

    • Rationale for Official Safety Nets

    • Key Components of Official Safety Nets in Major Financial Systems

      • Sources of Official Assistance and Guarantees

      • Measures to Limit Official Credit Risks

    • Economic Effects of Official Safety Nets

    • Proposals for the Reform of the U.S. Official Safety Net

  • V. Spontaneous Capital Market Financing for Developing Countries

    • Historical Background

    • Recent Developments

      • Bank Lending

      • Portfolio Flows

    • Re-Entry to Capital Markets: Addressing Investor Concerns

      • Counterparty Credit Risk and Country Transfer Risk

      • Liquidity Risks and Transaction Costs

    • Facilitating Market Re-Entry

  • VI. Bank Debt Restructurings and Secondary Market Developments

    • Bank Debt Restructurings

      • Recent Financing Packages

      • Debt Conversion Programs

    • Developments in the Secondary Market for Claims on Developing Countries

  • Box 1 Key Components of the Safety Net

  • Box 2 U.S. Treasury Recommendations

  • Statistical Appendix

  • References

  • Tables

  • I.

    • 1. Selected Economic Indicators, 1983–90

    • 2. Summary Balance of Payments of Major Industrial Countries

    • 3. International Lending, 1983-Third Quarter 1990

  • II.

    • 4. Change in Cross-Border Bank Claims and Liabilities, 1984-Third Quarter 1990

    • 5. Developments in International Bond Markets, 1983–90

    • 6. Equity Markets: Secondary Trading Values and Volumes, 1979–89

    • 7. International Equity Markets—Primary Issuance, 1986–89

  • III.

    • 8. Status of Selected EC Financial Directives

  • V.

    • 9. Structure of Developing Country Long-Term Debt

    • 10. Long-Term Bank Credit Commitments to Developing Countries, 1984–90

    • 11. Developing Countries: Terms on Syndicated Bank Credits, 1988–90

    • 12. International Bond Issues by Developing Country Borrowers, 1984–90

    • 13. Average Terms on International Bond Issues by Selected Developing Country Borrowers

  • VI.

    • 14. Chronology of Bank Debt Restructurings and Bank Financial Packages, 1984-March 1991

    • 15. Impact of Debt and Debt-Service Reduction Packages

    • 16. Debt Conversions, 1985–90

  • Appendix

    • A1. Long-Term and Short-Term Interest Rate Differentials Between the United States and Other Major Countries, 1987–90

    • A2. Volatility of Major Stock Prices, First Quarter 1987-Fourth Quarter 1990

    • A3. Stock Market Indices and Interest Rates, August 1–20, 1990

    • A4. United States: Balance of Payments, 1987-Third Quarter 1990

    • A5. Japan: Balance of Payments, 1987-Third Quarter 1990

    • A6. Germany: Balance of Payments, 1987-Third Quarter 1990

    • A7. United Kingdom: Balance of Payments, 1987-Third Quarter 1990

    • A8. Change in Interbank Claims and Liabilities, 1984-Third Quarter 1990

    • A9. Change in Claims on Nonbanks and Liabilities to Nonbanks, 1984- Third Quarter 1990

    • A10. Change in Cross-Border Bank Claims on and Liabilities to Developing Countries, by Region, 1984-Third Quarter 1990

    • A11. Concerted Lending: Commitments and Disbursements, 1985–90

    • A12. U.S. Banks, Developing Country Claims Relative to Capital, 1984-Third Quarter 1990

    • A13. External Assets of BIS Reporting Banks by Maturity and Undisbursed Credit Commitments, December 1985-December 1989

    • A14. Gross International Bond Issues and Placements by Groups of Borrowers, 1985–90

    • A15. Early Repayments of International Bonds, 1985–90

    • A16. Market for Equity-Related Bonds, 1985–90

    • A17. Market for Fixed Rate Bonds, 1985–90

    • A18. Market for Floating Rate Issues, 1985–90

    • A19. Borrowing on International Markets by Major Instruments, 1985–90

    • A20. Gross International Equity Flows, 1986-First Quarter 1990

    • A21. Net International Equity Flows, 1986-First Quarter 1990

    • A22. Destination of Cross-Border Mergers and Acquisitions, 1986-First Half 1990

    • A23. Financial Futures and Options: Exchanges, Contracts, and Volume of Contracts Traded, 1987–90

    • A24. Outstanding Swap Transactions by Currencies, 1987–89

    • A25. Capital/Asset Ratios of Banks in Selected Industrial Countries, 1980–89

    • A26. Long-Term Bank Credit Commitments, 1984–90

    • A27. Bank Credit Commitments by Country of Destination, 1984–90

    • A28. Terms of Long-Term Bank Credit Commitments, 1984–90

    • A29. International Bond Issues by Selected Developing Country Borrowers, 1989–90

    • A30. Amounts of Medium- and Long-Term Bank Debt Restructured, 1984–90

    • A31. Debt and Debt-Service Reduction in Commercial Bank Agreements, 1987-March 1991

    • A32. Terms of Selected Bank Debt Restructurings and Financial Packages, 1984–1990

    • A33. Terms and Conditions of Bank Debt Restructurings and Financial Packages, 1989-March 1991

    • A34. Financing Instruments and Options in New Money Packages and Restructurings of Bank Debt for Selected Developing Countries, 1984–1990

    • A35. Features of Selected Debt Conversion Schemes

  • Charts

  • I

    • 1. Five Major Industrial Countries’ Nominal Interest Rates 1983–90

    • 2. International Bond Issues by Major Instruments, 1985–

    • 3. Oil and Gold Prices, July 6, 1990-January 25, 1991

    • 4. Secondary Market Prices for Developing Country Loans

  • II.

    • 5. Major Industrial Countries: Stock Market Indices, January 1, 1989–January 31, 1991

    • 6. Impact of the Oil Price Rise on Developing Country Stock Markets

    • 7. Major Industrial Countries: Interest Rates, July 1–January 31, 1991

    • 8. Interest Rates Implied by Futures Contracts and Spot Rates for U.S. Treasury Bills, Notes, and Bonds

    • 9. Implied Volatility of Various Asset Prices, July 5, 1990–January 28, 1991

    • 10. Growth Rate of International Bank Claims, 1980-Third Quarter 1990

    • 11. International Bond Issues by Groups of Borrowers, 1985–90

    • 12. Currency Composition of International Bond Issues, 1985–90

  • V.

    • 13. Terms on International Bank Lending Commitments, 1979–90

    • 14. Yield on Selected Debt Instruments, 1987-First Quarter 1991

The following symbols have been used throughout this paper:

… to indicate that data are not available:

— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist:

- between years or months (e.g., 1990–91 or January-June) to indicate the years or months covered, including the beginning and ending years or months:

/ between years (e.g., 1990/91) to indicate a crop or fiscal (financial) year.

“Billion” means a thousand million.

Minor discrepancies between constituent figures and totals are due to rounding.

The term “country” used in this study does not in all cases refer to a territorial entity that is a state as understood by international law and practice. The term also covers some territorial entities that are not states, but for which statistical data are maintained and provided internationally on a separate and independent basis.

Preface

This study was prepared under the direction of Alessandro Leipold, Advisor in the Exchange and Trade Relations Department of the International Monetary Fund, with Donald Mathieson, Chief of the Financial Studies Division of the Research Department. The co-authors, staff members from both departments, are listed on the title page.

Background for the study was provided in part by informal discussions with commercial and investment banks, securities houses, stock and futures exchanges, regulatory and monetary authorities, and the staffs of the Bank for International Settlements, the Commission of the European Communities, the Organization for Economic Cooperation and Development, the World Bank, the International Finance Corporation, and the Japan Center for International Finance. The discussions took place in Amsterdam, Basle, Bonn, Brussels, Frankfurt, Hong Kong, London, New York, Ottawa, Paris, Tokyo, Toronto, Washington, and Zurich at various times between September and early December 1990.

In addition to the authors, other Fund staff members taking part in some of the discussions or making contributions to the study at various stages included C. Maxwell Watson and Charles Collyns (of the Exchange and Trade Relations Department). Staff of the Bureau of Statistics, particularly Richard Stillson and Robert Di Calogero, developed and compiled the data based on the Fund’s international banking statistics. Research assistance was provided by Can Demir and Rosa Vera-Bunge. Louis Pauly prepared the text for publication. Delrene Alvis, Gail Campbell, Sheila O’Connor, Margaret Tan, and Nora Whitehouse patiently typed and retyped the text and tables. Juanita Roushdy, of the External Relations Department, gave the manuscript a final edit and efficiently coordinated the production.

The study benefited from comments by staff in other departments of the Fund and by members of the Executive Board. Opinions expressed, however, are those of the authors and do not necessarily represent the views of the Fund or of the Executive Directors. Similar studies on international capital markets have been prepared in recent years; the previous study was published in April 1990 in the World Economic and Financial Surveys series. The present study was completed in February 1991 and reflects developments to that time.

The country classification used throughout this report is that of the October 1990 World Economic Outlook. In particular, the developing country category does not include certain Eastern European (Bulgaria, Czechoslovakia), African (Angola, Namibia), and Asian (Mongolia) countries nor the U.S.S.R. A new country classification is set out in the May 1991 World Economic Outlook.

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