This paper summarizes recent developments in the relationships between the IMF, member countries, and commercial banks, with specific reference to five European countries. The paper also highlights that Better assessment of trends in the market and of the attitude of commercial banks toward borrowing countries. These would include: a deeper analysis of capital flows, with special attention to interbank transactions; an improvement in the collection of statistical data and additional efforts made by member countries to release adequate information; and a further examination of the usefulness of setting up in the Fund an internal country risk assessment statistical model. The report also suggests that there should be adequate Fund involvement in rescheduling negotiations through discussions with Paris Club members on rescheduling patterns and possibly through an elaboration of guidelines for rescheduling bank claims; appropriate action to cope with liquidity crises; and adequate international cooperation among central banks acting as lenders of last resort.
The rapid increase in the external debt of nonindustrial countries since 1973–74 and the corresponding rapid growth in cross-border claims of commercial banks have led to a vulnerable structure of international debt. The risks inherent in the system had been pointed out by observers for several years. These risks materialized in 1982, when the persistence of high positive real interest rates, the deepening recession in industrial countries, and political tensions in several regional areas combined to induce a series of adverse developments:
During the 20 years from 1960 to 1980, gross external claims of banks in the BIS reporting area4 (including cross-border interbank claims) grew at an average annual rate of about 25 percent. As of December 31, 1983, they amounted to $2,024 billion ($1,085 billion excluding redepositing among reporting banks). Banks located in the United States, the United Kingdom, and offshore centers play a leading role in the expansion of gross external assets, and the U.S. dollar remains the predominant currency, representing almost three fourths of total claims (Table 1).
As a counterpart to the rapid increase in international bank lending, the external debt of borrowing countries, and especially that of non-oil developing countries, has risen dramatically in recent years. At the end of 1982, the total reported external debt of non-oil developing countries was $633 billion (plus about $100 billion of unreported short-term debt, mainly to suppliers and parent companies of subsidiaries), compared with about $130 billion at the end of 1973. To be sure, there has been a rapid growth of exports, and the ratio of total external debt to exports has not increased as rapidly as the ratio of total debt to gross domestic product. Since the origin of borrowed funds has shifted during the period from official sources to private sources31 with market-related variable interest rates and since interest rates have increased sharply, there has been a rapid deterioration in debt service ratios (the ratio of interest plus amortization to exports of goods and services standing at 23 percent in 1982 against 16 percent in 1973) and of the ratio of interest to current account receipts (11 percent in 1981 against 5.5 percent in 1970).32 Repayment obligations will thus represent a growing proportion of gross external financing requirements, amounting to more than one half of the gross external financing requirements of non-oil developing countries in the next five years. These obligations amounted to $200 million during the period 1977–81 (against $280 million in net borrowing requirements) and might reach $400 million during the period 1982–86.
Mr. Maxwell Watson, Mr. Peter M Keller, and Mr. Donald J Mathieson
This paper provides a description and analysis of recent developments in international capital markets and an assessment of the prospects for private financing flows, in particular to the developing countries.
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 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.
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.