International Monetary Fund. External Relations Dept.
The widening U.S. current account deficit and the associated large positions that foreigners are amassing in U.S. bonds and equities—roughly $5 billion—have garnered much attention from academics, policymakers, practitioners, and the financial press. There are many structural reasons for this accumulation. For portfolio equity investors, few countries protect the rights of outside investors more vigorously. For fixed-income investors, U.S. bond markets offer unparalleled depth and liquidity. But these large positions also leave foreigners exposed to fluctuations in U.S. asset prices. In an IMF Working Paper, Francis E. Warnock addresses this aspect of foreigners’ U.S. positions by assessing how a rapid decline in U.S. financial market prices could impact foreigners across a wide range of countries.
The ultimate expression of debt difficulties is the inability of a country to fulfill its commitments and the need for its creditors to agree to a stretching out of existing commitments under a rescheduling agreement. Some participants in the market, notably some investment bankers, consider debt rescheduling as a rather normal development in a system under which long-term development financing is provided without an adequate equity base and with a maturity pattern that is too short. Others, notably among commercial bankers, who have in some cases created special units to deal with rescheduling negotiations, consider that any breach of contractual commitments should entail a lengthy and difficult negotiation and a hardening of the terms of the loans subject to renegotiation.
The twenty-nine countries that participated in the 1997 CPIS accounted for approximately 80 percent of estimated world holdings of portfolio investment in the form of equities and long-term securities. The major investing countries/territories that did not participate included Germany, Luxembourg, Switzerland, Hong Kong SAR, and a number of offshore financial centers. Nonparticipants indicated that their primary reasons for not taking part in the 1997 CPIS were the difficulty of obtaining, from nonresident custodians, data on portfolio investments of resident households; the lack of participation by important partner countries; the absence of plans to compile IIP statements; and concern that the release of confidential data to CPIS compilers might discourage investment. These issues must be successfully resolved prior to implementation of the 2001 CPIS. The participation of the major investing countries and OFCs is essential if the 2001 CPIS is to provide a reliable measure of world holdings of portfolio investment assets and an equally reliable measure, which will be based on estimates from partner countries, of each participating country’s portfolio investment liabilities. The participation of other countries is essential, as well, to achieve broader application of BPM5 methodology. Therefore, vigorous efforts should be made to secure the participation of more major investing countries in order to address the under-reporting of global portfolio investment assets and to confirm the reliability of the global data on portfolio investment liabilities.
International bank lending has contributed to the expansion of the world economy in the past ten years. The simultaneous occurrence in 1982 of high interest rates, political tensions, and debt crises in several major borrowing countries has led to a major shift in the attitudes of bankers, has sharply reduced new lending, and has added to the difficulties encountered by certain countries.