II Recent Trends in International Capital Markets
Author:
International Monetary Fund
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Language:
English
Print Publication Date:
01 Jan 1987
Keywords:
WEFS; market participant; bank lending; U.S. dollar; bank supervisor; market discipline; risk exposure; commercial paper; fixed interest rate; credit bank market; U.K. bank; Bonds; International capital markets
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Abstract

Total lending through international bank credit and bond markets doubled to $338 billion during the first half of 1987, following the near doubling of such flows to almost $600 billion in 1986 (Table 1). The surge in total lending was entirely due to activity among industrial countries. In contrast, total lending through international bank credit and bond markets to developing countries slowed further to $5 billion during the 18-month period to mid-1987.1

General Developments

Total lending through international bank credit and bond markets doubled to $338 billion during the first half of 1987, following the near doubling of such flows to almost $600 billion in 1986 (Table 1). The surge in total lending was entirely due to activity among industrial countries. In contrast, total lending through international bank credit and bond markets to developing countries slowed further to $5 billion during the 18-month period to mid-1987.1

Table 1.

International Lending, 1981–First Half 1987

(In billions of U.S. dollars; or in percent)

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Sources: Bank for International Settlements (BIS); Organization for Economic Cooperation and Development; International Monetary Fund, International Financial Statistics; and Fund staff estimates.

IMF-based data on cross-border lending by banks are derived from the Fund’s international banking statistics (IBS) (cross-border interbank accounts by residence of borrowing bank plus international bank credits to nonbanks by residence of borrower), excluding changes attributed to exchange rate movements. BIS-based data are derived from quarterly statistics contained in the BIS’s International Banking Developments; the figures shown are adjusted for the effects of exchange rate movements. Differences between the IMF data and the BIS data are mainly accounted for by the different coverages. The BIS data are derived from geographical analyses provided by banks in the BIS reporting area. The IMF data derive cross-border interbank positions from the regular money and banking data supplied by member countries, while the IMF analysis of transactions with nonbanks is based on data from geographical breakdowns provided by the BIS reporting countries and additional banking centers. Neither the IBS nor the BIS series are fully comparable over time because of expansion of coverage.

Total lending includes offshore centers, international organizations, and other non-Fund members as well as industrial and developing countries.

Estimates based on BIS and OECD data.

Net of redemption and repurchases, and of double counting; that is, bonds taken up by the reporting banks to the extent that they are included in the banking statistics as claims on nonresidents and bonds issued by the reporting banks mainly for underpinning their international lending activity.

Excludes the seven offshore centers (The Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, and Singapore).

The pace of activity in the banking sector during 1986–87 was faster than in the international bond markets for the first time since 1981, reflecting a rapid expansion of interbank activity associated with the growth of international business in the main financial centers. Gross new international bond issues rose to a record level in 1986 and then declined during 1987 for the first time this decade, largely due to a sharp contraction in the floating rate note sector in the wake of the collapse in the perpetual floating rate note sector.

These developments in lending have been primarily influenced by large gross flows among the major financial centers to arbitrage financial market conditions and by the underlying financing requirements of industrial countries, as well as movements in international interest rates and exchange rates. In 1986 and 1987, external imbalances among industrial countries are estimated to have increased further, primarily as a result of a continued deterioration in the U.S. current account deficit (Table 14). Interest rates during 1986 and early 1987 declined, reaching their lowest level since 1978 in early 1987 (Chart 4), which encouraged during this period new issues of international bonds, in part to prepay existing debt. From early 1987 to September, U.S. interest rates rose by about 1½ percentage points; interest rates in other major industrial countries rose slightly over this period. The fall in the U.S. dollar exchange rate vis-à-vis most other major currencies that began in early 1985 was arrested during the first three quarters of 1987, following the decision of the major industrial countries to seek to stabilize exchange rates.

Chart 4.
Chart 4.

Five Major Industrial Countries: Nominal Interest Rates, January 1981–September 1987

(In percent)

Sources: International Monetary Fund, World Economic Outlook; and Fund staff estimates.1 Monthly averages of daily rates on money market instruments of about 90 days’ maturity.2 France, the Federal Republic of Germany, Japan, the United Kingdom, and the United States; using GNP-based weights.3 Monthly averages of daily or weekly yields on government bonds, with maturities ranging from 7 years for Japan to 20 years for the United Kingdom and the United States.

Equity prices in stock exchanges of major industrial countries, except for the Federal Republic of Germany, rose sharply during the first three quarters of 1987, continuing their advances of the past several years. In October, however, they fell sharply, returning prices, on average, to their levels at the end of 1986.

In contrast to the rapid growth in activity among industrial countries, lending through international bank and bond markets to developing countries declined to new lows in 1986—only $1 billion—before increasing slightly to $4 billion during the first half of 1987. These trends in private flows moved inversely to developments in the aggregate current account deficits of developing countries. This aggregate deficit nearly doubled in 1986 to $47 billion and is estimated to fall to $20 billion in 1987. Foreign direct investment and long-term borrowing from official creditors are expected to remain virtually unchanged during 1986–87. Consequently, the increase in the current account deficit in 1986 was financed by a slower accumulation of foreign assets by both the public and private sectors. Conversely, in 1987, much of the improvement in developing countries’ current account positions is expected to be reflected in a significant increase in international reserves.

Industrial Countries

Three key developments underlay the trends in industrial country capital markets activity in 1986–87. First, the process of financial liberalization has continued to spread, driven by concerns in certain countries to stimulate competition, and in others to avoid loss of business to other major centers. Second, reflecting this progressive liberalization and large sectoral imbalances between industrial countries, gross flows have expanded dramatically. As activity continued to surge in the three main centers—Tokyo, New York, and London—massive interbank flows were channeled into and between these centers, both to finance securities activities and to arbitrage borrowing opportunities. Third, the very rapid expansion in securities activity of the early 1980s was followed by a slump in such activity in 1987; in late 1986, the perpetual floating rate note market collapsed, seriously damaging the remainder of the floating rate note sector, while in October 1987 equity prices in stock exchanges of major industrial countries plunged.

Liberalization

Liberalization of financial markets continued to spread throughout the industrial economies during 1986–87. In the United Kingdom, a major restructuring of the domestic and international capital markets—the Big Bang—was enacted on October 27, 1986, under the Financial Services Act to create broader and more efficient markets for the securities and investment industries, and the creation of a domestic sterling commercial paper market. The Stock Exchange and gilt-edged market were reorganized and domestic and international securities markets merged. Self-regulatory organizations were established to oversee prudential aspects and ensure investor protection. In mid-1987, the Bank of England started a series of experimental auctions in U.K. Government bonds. Also in July 1987, the London International Financial Futures Exchange launched trading in a futures contract on Japanese Government bonds, in addition to existing contracts on U.K. and U.S. Government bonds.

In France, the authorities abandoned quantitative controls on credit, for the conduct of monetary policy, relying instead on financial market interventions. The maturities on public sector debt instruments were broadened significantly, while the range of private debt instruments was expanded to include certificates of deposit, commercial paper, and negotiable finance company bills. Hedging possibilities in French francs have also been enhanced by the opening of the forward, futures, and options market for financial instruments (MATIF). Exchange controls were virtually abolished to allow enterprises more flexibility in foreign exchange operations. In January 1987, bond market calendars were abolished, and the Euro-French issuing committee (comprising the Treasury and French banks) began admitting issues by French banks and foreign banks’ French subsidiaries. Previously, the market was open only to domestic nonbank and sovereign borrowers.

In the Federal Republic of Germany, the Bundesbank invited foreign-owned banks incorporated in Germany to join the federal loan consortium (currently, 73 banks underwrite domestic bond issues by the federal government, post office, and railways) with a limited issue quota of 20 percent. Also, the Bundesbank decided to permit the private use of ECUs, applying the same regulations as for foreign currencies. It has been proposed that, effective January 1989, a 10 percent withholding tax be reimposed on interest payments on bonds issued by residents in the Federal Republic of Germany.

In Japan, the segmentation of activities between securities firms and banks was further reduced. In March 1987, foreign firms were allowed to issue Euro-yen commercial paper (for Japanese firms one year later) and domestic banks and securities houses, to underwrite and trade on Euro-yen commercial paper. Foreign banks have been allowed to participate in security affiliates in Tokyo, and Japanese financial institutions were allowed to trade on their own in currencies, interest rates, bonds, and stock indices, plus financial futures and options listed in overseas markets. In June 1987, a further package of liberalization measures in Japan was announced that resulted in a number of developments, including the introduction of an auction for long-term government bonds in September 1987 and the establishment of a domestic commercial paper market in November. A sizable Japan Offshore Market came into being in December 1986; it does not include securities transactions at present. Life insurers were allowed to raise foreign currency loans to hedge their overseas investments.

In the United States, legal barriers to competition between commercial banks and securities firms were further modified. The Federal Reserve Board permitted three major New York money center banks to underwrite and deal in mortgage-backed securities and municipal revenue bonds (in one case also in commercial paper) through wholly owned securities subsidiaries, under certain conditions. The Federal Reserve Board also renewed its approval of commercial banks’ distribution of third-party commercial paper provided it is conducted through a commercial lending subsidiary that does not have a financial stake in the issues it places. Interstate banking continued to expand throughout the United States.

In Canada, a major liberalization of the financial system has been initiated to abolish the previous separation of activities of banks, securities houses, trust companies, and insurance companies. Federal regulatory authorities are being merged under a single Inspector General of Financial Institutions. The Italian authorities have greatly reduced foreign exchange regulations and have liberalized portfolio investments abroad. Competition in domestic markets has been enhanced by deregulating interregional banking and allowing commercial banks to create merchant banking subsidiaries.

Capital Flows

Gross capital flows among the industrial countries rose sharply owing to larger financial imbalances and greater liberalization. These gross flows were also influenced by arbitrage of remaining regulatory barriers and by portfolio preferences of the private sector. The two largest surplus countries have emerged both as major borrowers and lenders of short- and long-term funds. The influence of institutions in these countries over the pattern of private capital flows—and the impact of these on interest and exchange rates—thus far has exceeded the size of those countries’ current account surpluses. During 1986 and the first three quarters of 1987, Japanese long-term capital outflows—a high proportion of which took the form of securities transactions—reached $220 billion. In addition to its own surplus savings, Japan borrowed $119 billion in short-term funds—largely through banks, in part to obtain funding on terms not available under present institutional arrangements in Japan and in part to finance purchases of foreign securities. During the third quarter of 1987, both long-term capital outflows and short-term borrowing decreased significantly.

Notwithstanding the sharp rise in its current account surplus during 1986 and the first three quarters of 1987, the Federal Republic of Germany experienced a net inflow of long-term capital of $15 billion. Nearly all the net bond issues of the German Government during this period were purchased by foreign investors, while foreign investment in private sector bonds and equities also reached unprecedented levels. Germany experienced large short-term capital outflows of $62 billion during this period; most of these reflected deposits by banks and nonbanks in Germany with banks in the Euromarkets. During the third quarter of 1987, both long-term and short-term flows reversed their earlier direction, as net long-term outflows occurred coupled with modest short-term inflows. Gross banking flows in and out of the United Kingdom and the United States doubled to about $325 billion in 1986, partly reflecting their roles as international financial centers. These flows grew further, albeit at a slower pace—30 percent—during the second half of 1987 compared with the same period in 1986.

Lending to industrial countries through international bank credit and bond markets doubled to $276 billion during the first half of 1987. This trend reflected continuation of the rapid growth experienced in 1986 when the flows reached a record level of $478 billion—nearly double the level of 1985. Greater interbank activity has been the principal factor underlying these developments. As a result, there was a shift in the source of lending to banks from international bond markets, reversing an earlier trend. Bank lending to industrial countries during the first half of 1987 accounted for 87 percent of the flows through bank credit and international bond markets to these countries compared with 75 percent in 1985.

International banking activity with industrial countries, which in 1986 grew by 21 percent (in relation to outstanding claims) to $401 billion, accelerated further during the first half of 1987 (Table 2). This acceleration was particularly pronounced in the interbank market. In the first half of the year, interbank activity among industrial countries tripled from the comparable period the year before, rising to about $200 billion (Table 15). Banks in Japan led this expansion, in contrast to their normal seasonal pattern. Normally in the second quarter, a seasonal unwinding of interbank positions with Japan following the conclusion of its financial year would be expected; instead, these positions rose substantially. Besides Japan, banks in the United Kingdom and the United States continued to be the most active in the interbank market (these three countries accounted for about 60 percent of interbank activity within industrial countries). A number of factors may account for this expansion of interbank activity during 1986–87: the funding by bank head offices of increases in bond-trading portfolios held by branches and subsidiaries located in major financial centers, especially transactions among related offices of Japanese banks (Table 16); the further integration of Japanese financial markets into the international financial system, including creation of the Japan Offshore Market in December 1986.

Table 2.

Bank Lending and Deposit Taking, Total Cross-Border Flows, 1982–First Half 19871

(In billions of U.S. dollars)

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Sources: International Monetary Fund, International Financial Statistics (IFS); and Fund staff estimates.

Data on lending and deposit taking are derived from stock data on the reporting countries’ liabilities and assets, excluding changes attributed to exchange rate movements.

As measured by differences in the outstanding liabilities of borrowing countries defined as cross-border interbank accounts by residence of borrowing bank plus international bank credits to nonbanks by residence of borrower.

Excluding offshore centers.

Consisting of The Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, and Singapore.

Transactors included in IFS measures for the world, to enhance global symmetry, but excluded from IFS measures for “All Countries.” The data comprise changes in identified cross-border bank accounts of centrally planned economies (excluding Fund members), and of international organizations.

Calculated as the difference between the amount that countries report as their banks’ positions with nonresident nonbanks in their monetary statistics and the amounts that banks in major financial centers report as their positions with nonbanks in each country.

Consisting of all developing countries except the eight Middle Eastern oil exporters (the Islamic Republic of Iran, Iraq, Kuwait, the Libyan Arab Jamahiriya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) for which external debt statistics are not available or are small in relation to external assets.

Consisting of all developing countries except the eight Middle Eastern oil exporters (listed in footnote 7 above), Algeria, Indonesia, Nigeria, and Venezuela.

As measured by differences in the outstanding assets of depositing countries, defined as cross-border interbank accounts by residence of lending bank plus international bank deposits of nonbanks by residence of depositor.

Lending to, minus deposit taking from.

During the first half of 1987, bank lending to non-banks in industrial countries amounted to $38 billion, twice the amount recorded in the corresponding period of the previous year and slightly more than the amount for 1986 as a whole (Table 17). Nearly three fourths of such lending during 1986 and the first half of 1987 was directed to nonbanks in Japan and the United States. Deposit taking from nonbanks declined slightly, to $25 billion, during the first half of 1987 after having more than doubled to $56 billion in 1986.

Transactions with Japan dominated international banking activity during 1986 and the first half of 1987, accounting for about 40 percent of all lending among industrial countries. The growth in these transactions was partly explained by the increasing integration of the Tokyo financial market internationally and the establishment in December 1986 of the Japan Offshore Market, which expanded to $162 billion at the end of June 1987.

At the same time, the comparative narrowness of the domestic financial market has led Japanese borrowers and investors to the Euro-yen market, which has offered a larger variety of instruments with more flexibility than was available domestically, giving rise to an increase in the round-tripping phenomenon whereby lending to Japanese residents is financed among themselves but intermediated by the international, instead of domestic, banking system. Bank lending to Japanese nonbanks was $13 billion during the first half of 1987, more than twice the amount recorded for the whole of 1986, reflecting in part increased reliance by nonbanks in Japan on external financing as authorities took measures to curb domestic credit growth. Overall, there was a net inflow of $47 billion from international banks to residents of Japan during the first six months of 1987, compared with $8 billion during the corresponding period of 1986, continuing an upward trend of net flows into Japan that had begun in mid-1986.

During 1986 and the first half of 1987, international banking transactions with the United Kingdom were the second most active, almost entirely within the interbank market. Interbank activity—lending plus deposit taking—with the United Kingdom more than doubled to $66 billion during the first half of 1987 (accounting for 95 percent of bank lending to that country) from the comparable period in 1986. For 1986 as a whole, interbank activity with the United Kingdom totaled $146 billion, of which about 80 percent represented transactions occurring in the second half of the year. Interbank transactions between banks in the United Kingdom and Japan were particularly large. During 1986 and the first half of 1987, activity with other European countries, especially the Federal Republic of Germany and France, also expanded substantially, mainly in the interbank market. Overall, the largest net flow of funds to international banks during 1986 and the first half of 1987 was from the Federal Republic of Germany, followed by Switzerland, and the United Kingdom.

During the first half of 1987, international bank lending to residents of the United States declined by $7 billion to $17 billion, compared with the same period in 1986. This development contrasts with the near doubling, to $93 billion, of bank lending to the United States during 1986. International bank lending to nonbanks in the United States continued at a relatively high level during 1986 and the first half of 1987; such lending accounted for two thirds of total lending to the United States, compared with a 5 percent share for such lending to industrial countries. In contrast, interbank activity stagnated somewhat during the first half of 1987 after doubling to $68 billion in calendar 1986, owing to large declines in interbank positions—both assets and liabilities—between banks in the United States and their affiliates in offshore banking centers in the Caribbean. During 1986 and the first half of 1987, a net inflow of $22 billion in banking resources was recorded for the United States, which helped finance only a small portion of the U.S. current account deficit of $217 billion during this period.

Stresses in Securities Markets

For the first time in this decade, issuing activity in international bond markets experienced a sustained downturn, declining by about 15 percent during the first nine months of 1987 to $146 billion, compared with the same period in 1986 (Table 3); this downturn followed a 35 percent increase in total gross bond issues to $227 billion in 1986—a record level. The decline in issuing activity in the first nine months of 1987 was more than accounted for by the $35 billion reduction in new issues of floating rate notes after the collapse of the market in perpetual notes in December 1986. Borrowers from industrial countries during 1986 and the first three quarters of 1987 accounted for about seven eighths of all international bond issues (Chart 5 and Table 18). Borrowers in developing countries, excluding offshore centers, also issued progressively less during 1986 and the first three quarters of 1987; developing countries’ share of total international bond issues was smaller than at any other comparable time during this decade.

Table 3.

Developments in International Bond Markets, 1981–Third Quarter 1987

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Sources: Organization for Economic Cooperation and Development, Financial Statistics Monthly and Financial Market Trends; and Fund staff estimates.

Gross issues less scheduled repayments and early redemption.

Figure shown for the first three quarters of 1987 is estimated.

Three-month deposits, at end of period.

Bonds with remaining maturity of 7–15 years, at end of period.

Chart 5.
Chart 5.

International Bond Issues by Groups of Borrowers, 1983–Third Quarter 1987

(In percent)

Source: Organization for Economic Cooperation and Development, Financial Statistics Monthly.

During the first nine months of 1987, refinancing activity in international bond markets continued the upward trend of the past five years, although at a somewhat reduced pace (Table 19). Borrowers continued to exercise call provisions—early refinancing—in response to declines in interest rates and margins, although such activity leveled off during the first three quarters of 1987, as interest rates firmed, and then rose. Scheduled amortization payments rose further during 1986–87. Net international bond issues (gross issues less early refinancing and scheduled amortization payments) fell by about the same amount as gross bond issues to $93 billion, during the first nine months of 1987 from $127 billion during the same period in 1986; total net international bond issues reached a record $163 billion in 1986. No information is available on the amount of bonds purchased by banks during the first nine months of 1987; however, during the first half of 1987, such purchases amounted to about $25 billion, one third less than a year earlier. This lower level of bank purchases was partly related to the declines in issuing activity in the floating rate note market.

The currency composition of new bond issues was strongly affected by the rise in U.S. dollar interest rates, the decline in the U.S. dollar exchange rate, and the collapse of the floating rate note market, which was principally denominated in the U.S. dollar. Only 37 percent of all new bond issues during the first nine months of 1987 were denominated in U.S. dollars, compared with 55 percent in 1986 (Chart 6). (The growing importance in international bond markets of combining currency and interest swaps implies that data on currency denomination and instruments by borrowers are not necessarily a good indicator of either the currency composition or interest rate structure of the borrowers’ ultimate debt-servicing obligations.) The Japanese yen and the Swiss franc gained from the shift away from the U.S. dollar and accounted for 12–14 percent each of new issues during the first three quarters of 1987, compared with 10 percent in 1986. The deutsche mark’s share remained unchanged at 8 percent during 1986 and the first nine months of 1987, while other currencies and the ECU increased their share sharply to 29 percent during the first three quarters of 1987 from 17 percent in 1986.

Chart 6.
Chart 6.

Currency Composition of International Bond Issues,1 1983–Third Quarter 1987

(In percent)

Source: Organization for Economic Cooperation and Development, Financial Statistics Monthly.1 Based on exchange rates prevailing at time of bond issue.

The relative share of instruments used for new issues changed considerably between 1986 and 1987. While fixed interest rate bonds continued to account for roughly two thirds of total issues, equity-related bond issues more than doubled their share to about one fourth of total bond issues during the first three quarters of 1987 (Chart 7 and Table 20). Equity-related bonds during this period benefited from buoyant equity markets. Floating rate notes, on the other hand, accounted for only 4 percent of the total during the first nine months of 1987, compared with 24 percent during the same period in 1986.

Chart 7.
Chart 7.

International Bond Issues by Major Instruments, 1983–Third Quarter 1987

(In percent)

Source: Organization for Economic Cooperation and Development, Financial Market Trends.

New issuance of fixed interest rate bonds fell by almost 10 percent, to $102 billion, during the first nine months of 1987, after an almost 50 percent increase to $142 billion in 1986 (Table 21). The overall decline in fixed rate issues during 1987 was more than accounted for by reduced issues by borrowers from Canada and the United States, a result of concerns about the future course of interest rates stemming from the increase in U.S. dollar interest rates. Issues of fixed interest rate bonds by a number of borrowers from European countries, notably Belgium, the Federal Republic of Germany, and the United Kingdom, increased substantially during the first three quarters of 1987, compared with a year earlier. An increasing share of fixed interest rate international bond issues was swap related. During the first half of 1987, about 26 percent of these issues were swap related, compared with about 15 percent in 1986. The share of swap-related bonds was especially high for issues denominated in ECUs, yen, and Australian dollars. Indeed, an estimated 65 percent of fixed interest rate Australian dollar bonds were swapped during the first half of 1987.

New issues of floating rate notes amounted to only $6 billion during the first three quarters of 1987, compared with $41 billion during the same period in 1986 (Table 22); floating rate notes totaled about $51 billion in 1986. Activity in the floating rate sector of the international bond market has been sharply curtailed since December 1986 because of the collapse in the market for perpetual floating rate notes, which were issued by banks as primary capital; these instruments were, however, priced as money market instruments and not as equity instruments. A total of $19 billion perpetual floating rate notes were outstanding in 1986. A large proportion of these instruments was reportedly held by Japanese financial institutions.

Market making in these instruments virtually ceased from December 1986, as prices fell sharply and liquidity vanished. According to market participants, this development reflected typical “overshooting,” as illusions about liquidity built up and then collapsed—at which point it became apparent that nonbank investor demand for these instruments had been negligible. A contributory factor may have been rumors that bank supervisors in additional industrial countries were considering applying to these notes capital costs that would avoid “double leveraging” of the international banking system (i.e., banks holding each others’ capital).

The market for dated floating rate notes was adversely affected by these developments. The collapse in the market for perpetual floating rate notes spilled over into the market for dated floating rate notes in 1987 and damaged overall issuing activity. Even though borrowers from developing countries reduced their new issues into this market, they were less adversely affected than other borrowers. Hence, the share of developing countries in the floating rate market increased to 15 percent during the first nine months of 1987, compared with only 4 percent in 1986.

The equity-related bond market continued its rapid expansion during 1986 and the first nine months of 1987 (Table 23). Driven in part by rising share prices in equity markets during the period, the volume of equity-related bond issues more than doubled during the first nine months of 1987 to $36 billion; such issues had also doubled in 1986, reaching $27 billion. During the period under review, about two thirds of these bonds were issued by Japanese borrowers and most of them were purchased by Japanese investors; the popularity of such instruments with Japanese issuers has been partly due to the fact that it is less costly and less time consuming to issue them abroad. Since October 1987, the sudden decline in equity prices has brought the market for equity-related bonds to a virtual halt.

The bull market in the stock exchanges of the Federal Republic of Germany, Japan, the United Kingdom, and the United States appeared to have run out of steam in September; equity prices, after recording sharp price increases earlier in the year and over the previous few years, were down somewhat in these major stock exchanges, except in London, which had a small gain. However, in October, equity prices plunged, especially in New York. On October 19—the day of the “meltdown”—the Dow Jones Industrial Average fell by 23 percent, which was nearly four times the previous postwar record (set in the early 1960s) for a daily drop. By way of comparison, the decline on the worst day of the October 1929 crash was 13 percent. In Japan and the United Kingdom, the two-day declines in equity prices were 17 percent and 21 percent, respectively, similar to those in the United States (18 percent); whereas the decline was smaller in the Federal Republic of Germany (11 percent).

There has been some recovery between October 20 and the end of November. Comparing the most recent data with price averages for August, however, the largest decline has been in the Federal Republic of Germany (40 percent), followed by the United Kingdom and the United States (both 29 percent); the Japanese market has fallen by only 15 percent over this period. Adopting a longer perspective, the declines that had occurred through November have had the effect of bringing stock market indices back roughly to their March 1987 levels in Japan, their October-November 1986 levels in the United States and the United Kingdom, and to their April 1985 levels in the Federal Republic of Germany.

The sharp and simultaneous decline in equity prices among these major stock exchanges was unprecedented. Analysis of the factors that led to the events of October was ongoing and incomplete at the time of publication. Nevertheless, certain common influences on equity prices may be discerned. First, market participants in October had become more concerned about the macroeconomic environment, particularly about the implications of limited economic policy coordination among major industrial countries. The immediate adverse implications perceived by market participants were the smaller-than-expected improvement in the U.S. trade deficit, rising U.S. interest rates, including an increase in the U.S. discount rate in September, and statements by some officials indicating that policy tensions, especially related to exchange rates, were reviving among the major industrial countries.

Second, the sharp increases in equity prices in the several years prior to October 1987 had left stock markets vulnerable to a deterioration in economic conditions and prospects. As a result of these earlier price increases, average price-earnings ratios had risen significantly; in Japan and the United States, these ratios had reached historic highs in September 1987. Concerns about a slowdown in economic activity and diminished earnings prospects may have made these price-earnings ratios appear vulnerable and may have led to a weakening of equity prices. In addition, dividend yields (i.e., dividend payments as a percentage of share price) had been similarly depressed by the increase in equity prices. Higher and rising interest rates on government bonds in these four industrial countries in early October 1987 led to a large increase in the yield differential between government bonds and equities. Indeed, this yield differential rose to levels not experienced since 1983—near the beginning of the bull markets—and that were unusually high. In the absence of lower interest rates, lower equity prices narrowed the yield differential to more customary levels.

Third, recent liberalization measures, innovations, and structural changes in equity markets may have made national markets more sensitive to new developments, including in foreign equity markets. International integration of equity markets has occurred in several ways. Major financial institutions from the major financial centers have established offices in each others’ financial centers. In addition, cross-border holdings of securities by insurance companies, pension funds, and private individuals (e.g., in the United States, through international equity mutual funds) have increased substantially. Furthermore, major international corporations have registered their shares in the stock exchanges of key financial centers. These developments, combined with advances in computer and telecommunications technology, have made possible closer links between these markets than ever before. These technological advances have also permitted market participants to react faster and in larger volumes to new information. The role in the stock market and of certain innovations, such as stock-index futures and options, and program-trading strategies that arbitrage those future and option contracts with actual stock prices, has been the center of controversy and is under active study by several official bodies. Although it is too early to reach conclusions, some observers have noted that large-scale program trading was principally limited to the United States where equity-price volatility has been recently the greatest.

Developing Countries

Overview of Financing

During 1987, the combined current account position of developing countries is expected to improve markedly after a doubling of their deficit in 1986. Official flows of financing and direct investment are again expected to be the main source of financing while some resumption of bank lending is envisaged. During the first half of 1987 developing countries borrowed $4 billion through international bank and bond markets compared with only $1 billion during 1986. This small increase in private financing to developing countries reflected a modest increase in bank claims of $3 billion during the first half of 1987 after a net repayment of $1 billion in 1986 (Table 4).2,3 Bond issues (net of redemptions, repurchases, and banks’ purchases of bonds) by developing countries amounted to only $1 billion during the first half of 1987 and thus remained at the low level to which they had fallen in 1986. The 15 heavily indebted countries repaid some $0.3 billion in the first half of 1987, compared with $1.5 billion in 1986. The share of banks’ claims on developing countries in total international claims has continued to decline in 1986 and the first half of 1987 (Chart 8).

Table 4.

Bank Lending to Developing Countries, 1983–First Half 19871, 2

(In billions of U.S. dollars; or in percent)

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Sources: Bank for International Settlements (BIS); Organization for Economic Cooperation and Development; International Monetary Fund, International Financial Statistics; and Fund staff estimates.

IMF-based data on cross-border lending by banks are derived from the Fund’s international banking statistics (IBS) (cross-border interbank accounts by residence of borrowing bank plus international bank credits to nonbanks by residence of borrower), excluding changes attributed to exchange rate movements. BIS-based data are derived from quarterly statistics contained in the BIS’s International Banking and Financial Market Developments; the figures shown are adjusted for the effects of exchange rate movements. Differences between the IMF data and the BIS data are mainly accounted for by the different coverages. The BIS data are derived from geographical analyses provided by banks in the BIS reporting area. The IMF data derive cross-border interbank positions from the regular money and banking data supplied by member countries, while the IMF analysis of transactions with nonbanks is based on data from geographical breakdowns provided by the BIS reporting countries and additional banking centers. Neither the IBS series nor the BIS series are fully comparable over time because of expansion of coverage.

Excluding the seven offshore centers (The Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, and Singapore).

Excluding bridge loans.

Chart 8.
Chart 8.

Concentration of Cross-Border Claims, 1976–First Half 1987

(In percent)

Sources: Bank for International Settlements, International Banking and Financial Market Developments; International Monetary Fund, International Financial Statistics; and Fund staff estimates.1 Owing to a change in coverage of the BIS reporting area, there is a break in the series.

Bank lending statistics may underrecord actual bank lending to developing countries because of, inter alia, unrecorded bank purchases of bonds and certain transactions that reduce bank claims without requiring a cash repayment. Such transactions include loan sales to nonbanks and nonreporting banks, write-offs by banks, and the transfer of guaranteed bank claims to export credit agencies. Reductions in claims on developing countries also resulted from enlarged operations under officially recognized debt conversion schemes; during the first nine months of 1987, debt conversions amounted to $2.3 billion, compared with $1.6 billion in 1986. In addition, the sale of certain Japanese banks’ claims on Mexico to a Japanese nonbank entity in the Cayman Islands in March 1987 reduced reported bank claims on developing countries by $0.8 billion during the first half of 1987.

Overcounting of bank claims, on the other hand, may occur when interest arrears accumulate or loan claims on nonbanks are transferred to banks (i.e., the central bank). Such transfers should result in an increase in interbank claims offset by a decline in claims on nonbanks. However, international banks that report their claims on banks and nonbanks may not properly reclassify their claims on nonbanks, which would result in overcounting and an overestimation of lending. Only rough estimates are available of the magnitude of most of the factors that distort bank claims data, but, including these factors, bank claims on developing countries were probably slightly larger than reported during the first half of 1987 and in 1986.

This adjusted flow does not coincide with the change in banks’ risk exposure to developing countries because some bank claims are guaranteed by official export credit agencies. A joint publication of the BIS and the Organization for Economic Cooperation and Development (OECD)4 provides information on the stock of banks’ officially guaranteed claims on developing countries, but not on exchange rate adjusted flows. The Development Assistance Committee (DAC) has estimated that net export credits to developing countries increased by only $2 billion in 1986 after $3 billion in 1985.5 Allowing for this factor, banks’ risk exposure to developing countries in 1986 may have declined slightly.

Since the magnitude of these various adjustment factors can only be estimated and since no reliable regional breakdown is available, the discussion of bank lending that follows does not incorporate any estimates based on underrecording of claims or increases in official guarantees.

The resumption in recorded bank lending to developing countries during the first half of 1987 reflected mainly the absence of net repayments from countries with debt-servicing problems as a group; such repayments had amounted to $9 billion in 1986, but were near zero for the first half of 1987 including higher interest arrears. Countries with access to spontaneous bank finance borrowed $3 billion during the first half of 1987, slightly less at an annualized rate than the net $7.5 billion borrowed in 1986. Positive bank lending was registered for all regions but Africa during the first half of 1987, while Asia was the only region in 1986 which experienced an increase in bank claims.

Disbursements under concerted lending commitments6 were directed to Mexico ($3.5 billion) and Panama ($9 million) during the first half of 1987 and more than equaled the total amount of such disbursements in 1986 (Table 24). Net disbursements, however, were smaller as Mexico repaid, in April 1987, a bridge loan disbursed by banks in December 1986. Concerted lending disbursements decreased by 40 percent, to $3.3 billion in 1986, and were mainly directed to countries engaged in internationally supported adjustment programs (Argentina, Chile, Colombia, Panama, the Philippines, and Poland); in addition, the $0.5 billion bridge loan to Mexico was disbursed. Western Hemisphere countries received about 80 percent of the total disbursements under such packages in 1986, and the remainder was disbursed to the Philippines and Poland.

New long-term bank credit commitments7 to developing countries amounted to $13.7 billion during the first three quarters of 1987, about a third lower than in the corresponding period of 1986 almost entirely due to lower concerted commitments (Chart 9 and Table 5). Apart from the $1,950 million of new money committed under a concerted lending package for Argentina during the first three quarters of 1987, the remaining amounts represented spontaneous commitments. These spontaneous credits amounted to $11.7 billion during the first three quarters of 1987, only slightly less than such commitments during the corresponding period of 1986. Over 90 percent of the spontaneous lending was directed to countries in Asia and Europe. In 1986, banks had increased their long-term credit commitments by nearly one half to $25.4 billion. This increase, to a large extent, reflected a nearly fourfold increase of concerted lending commitments, to $8.1 billion; spontaneous lending commitments increased moderately in 1986 to $17.3 billion. Geographically, both spontaneous and concerted lending commitments were highly concentrated. Nearly 80 percent of spontaneous lending commitments were directed to Asian and European countries, while most concerted lending was committed to the Western Hemisphere (Mexico, $7.7 billion) and, to a lesser degree, Africa (Nigeria, $320 million, and the Congo, $60 million).8

Chart 9.
Chart 9.

Bond Issues and Long-Term Commitments of Credits and Facilities to Capital Importing Developing Countries, 1981–Third Quarter 1987

(In billions of U.S. dollars)

Sources: Organization for Economic Cooperation and Development, Financial Statistics Monthly; and Fund staff estimates.1 Includes a facility arranged for Mexico.2 First three quarters of 1987 on an annualized basis.
Table 5.

Long-Term Bank Credit Commitments to Developing Countries, 1981–Third Quarter 19871

(In billions of U.S. dollars)

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Sources: Organization for Economic Cooperation and Development, Financial Statistics Monthly; and Fund staff estimates.

Owing to rounding, components may not add.

Includes agreements in principle with Argentina, Côte d’Ivoire, Ecuador, and the Philippines.

Includes $0.1 billion revolving trade facility for Costa Rica.

Includes agreements in principle with the Congo, Mexico, and Nigeria.

Includes agreement in principle with Mexico.

Includes agreement in principle with Argentina.

Excludes offshore banking centers.

Concerted lending refers to bank credit commitments obtained during 1983–87 and coordinated by a bank advisory committee (i.e., Argentina, Brazil, Chile, Colombia, the Congo, Côte d’Ivoire, Ecuador, Mexico, Nigeria, Panama, Peru, the Philippines, Uruguay, and Yugoslavia).

Excludes the extension of a bridging loan of $1.3 billion to Argentina and $0.2 billion revolving trade facility to Costa Rica.

Includes $0.3 billion concerted lending commitment to Panama.

Includes $0.1 billion concerted lending commitment to Panama.

During the first three quarters of 1987, developing countries both from Asia and Europe arranged $0.9 billion in other long-term external bank facilities (Table 26). This represented a sharp decline relative to the $3.5 billion of long-term facilities arranged during the corresponding period of 1986. Moreover, no developing country tapped the market for Eurocommercial paper during the first three quarters of 1987, while China, Korea, and Turkey had issued $0.5 billion of such instruments in 1986.

Ten restructuring agreements were reached in principle during the first three quarters of 1987 (Tables 27 and 28). The amount of medium- and long-term debt restructured under these agreements amounted to $87 billion, thus exceeding by nearly two fifths the value of restructurings during the whole of 1986. MYRAs with Argentina, Chile, Jamaica, the Philippines, Poland, and Venezuela represented over 85 percent of all rescheduled amounts during that period. South Africa reached a second interim arrangement with its banks under which an estimated $10.9 billion of principal falling due between mid-1987 and mid-1990 would be rolled over until at least June 30, 1990. Romania obtained a modification in the terms of the 1986 restructuring agreement. In addition, concerted short-and medium-term facilities of $31 billion continued to be maintained during 1986 and throughout the first three quarters of 1987 (Table 29).

Ten restructuring agreements reached in principle in 1986 covered $62.5 billion. Three Western Hemisphere countries (Brazil, Mexico, and Uruguay) accounted for 85 percent of all rescheduled amounts; five African countries (the Congo, Côte d’Ivoire, Morocco, Niger, and Nigeria) and two developing countries in Europe (Poland and Romania) accounted for the remainder. The agreements signed with Côte d’Ivoire, Mexico, and Uruguay were MYRAs and accounted for nearly 75 percent of total reschedulings in 1986.

Gross international bond issues by borrowers in developing countries (including offshore centers) continued to decline during the first nine months of 1987. The share of developing countries in total international bond issues dropped from 6 percent in 1985 to about 2½ percent in 1986 and the first three quarters of 1987. Thirteen developing countries issued $3.7 billion in new bonds during the first three quarters of 1987, compared with 19 countries that issued $4.4 billion in all of 1986 (Table 6). Developing countries in Europe stepped up bond issues to $1.8 billion of bonds during the first three quarters of 1987, nearly half of total bond placements by developing countries during that period; these countries in Europe issued only $1.1 billion in 1986. Hungary and Portugal each issued $0.6 billion of international bonds during the first nine months of 1987, while Greece and Turkey issued about $0.4 billion and $0.2 billion, respectively. In Asia, China ($0.8 billion), Korea ($0.3 billion), India and Malaysia ($0.2 billion each), and Indonesia ($25 million) issued bonds totaling $1.6 billion, $1 billion less than during the same period in 1986. Except for offshore centers, which placed $0.3 billion, other international bond issues by developing countries during the first three quarters of 1987 were confined to Colombia, Trinidad and Tobago (about $50 million each), and Israel ($35 million). For the first time in many years, there were no international bond issues from borrowers in Africa.

Table 6.

International Bond Issues by Developing Countries, 1982–Third Quarter 19871

(In millions of U.S. dollars)

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Source: Organization for Economic Cooperation and Development, Financial Statistics Monthly.

Foreign bonds and Eurobonds.

Excludes offshore banking centers.

Developing countries’ deposits with international banks increased by $18 billion during the first half of 1987, compared with a withdrawal of $18 billion during the corresponding period in 1986; for 1986 as a whole, however, developing countries withdrew only $4 billion (Table 30). This reversal in the first half of 1987 was explained to a large extent by the improvement in the oil prices and other major commodities and the continued strong current account position of some Asian countries. Interbank deposits also experienced an increase of some $15 billion during the first half of 1987 compared with a decline of $7 billion during all of 1986, reflecting an improvement in official reserves particularly from surplus countries in Asia and fuel exporting countries in general (Table 31). Depositing by nonbanks in developing countries increased by $3 billion during the first half of 1987; in 1986, depositing by nonbanks from developing countries amounted to $2 billion—down sharply from $22 billion during 1985 (Table 32).

Regional Pattern of Flows

All regions except Africa obtained some net financing through international bank and bond markets during the first half of 1987.9 During 1986, by contrast, only borrowers in developing countries in Asia and Europe had obtained net financing, while countries in Africa, the Middle East, and the Western Hemisphere made net repayments.

Developing countries in the Western Hemisphere borrowed net $0.2 billion through international bank and bond markets in the first half of 1987, compared with a net repayment of $0.8 billion in all of 1986. Borrowing from international banks amounted to $0.1 billion in the first half of 1987—compared with net repayments of $1.5 billion during calendar year 1986. Debt conversion operations under official schemes in Brazil, Chile, Costa Rica, Ecuador, and Mexico increased considerably to $2.1 billion in the first three quarters of 1987 from $1.6 billion in calendar 1986. The only Western Hemisphere countries where bank claims rose, owing to interest arrears, in the first half of 1987 were Brazil ($1.5 billion) and Ecuador ($0.2 billion). Partly as a result of debt conversion operations, repayments were recorded in Chile ($0.7 billion), and Mexico ($0.2 billion); Argentina, Colombia, and Venezuela also repaid $0.2 billion each.

U.S. banks reduced their consolidated claims on developing countries in the Western Hemisphere by $2.3 billion on an annualized basis (2.7 percent) in the first half of 1987, compared with a reduction of $3.5 billion (4 percent) in 1986 (Tables 33 and 34).10 During the 18-month period to mid-1987, the largest reductions were recorded vis-à-vis Venezuela ($1.6 billion) and Brazil ($1.5 billion); claims on Argentina increased marginally. Lending by U.S. banks to Mexico resumed during the first half of 1987 ($0.7 billion) after net repayments of $1.3 billion in the full year 1986. German banks (including branches and subsidiaries) also appear to have reduced their exposure on developing countries in the Western Hemisphere. By contrast, U.K. banks increased, on a consolidated basis and unadjusted for exchange rate changes, their exposure to Western Hemisphere countries by $1.4 billion (4.5 percent on an annualized basis) in the first half of 1987, continuing the trend observed during 1986.

Bonds issued by Western Hemisphere countries were only $0.1 billion during the first three quarters of 1987; Colombia and Trinidad and Tobago issued about $50 million of bonds each. During all of 1986, countries in the Western Hemisphere had issued bonds for $0.7 billion including $0.6 billion in securitization of Brazilian and Mexican interbank credit lines.

Banks’ long-term credit commitments to Western Hemisphere countries amounted to $2.1 billion during the first three quarters of 1987, only one fourth of the amount committed during the same period in 1986. This decline was mainly the result of a sharp fall in concerted lending commitments. During the first three quarters of 1987, only Argentina received commitments of $1.55 billion in new long-term money and a $400 million trade facility on a concerted basis; during 1986, $7.7 billion in concerted lending was committed to Mexico. There were only $0.1 billion of spontaneous long-term external credit commitments to Western Hemisphere countries during the first nine months of 1987, compared with $0.8 billion in 1986. There were no other international long-term bank facilities committed to Western Hemisphere countries during the first three quarters of 1987.

Western Hemisphere residents increased their deposits with international banks by $1.5 billion in the first half of 1987, compared with a $0.5 billion increase in all of 1986. Interbank deposits increased by $2.4 billion, reflecting improvements in the international reserve position of these countries, after a $5.4 billion withdrawal in calendar 1986. Deposits from banks in Mexico ($6.0 billion) increased significantly during the first half of 1987. Deposits of nonbanks in the region declined by $0.9 billion, reflecting some repatriation of capital; during all of 1986 such deposits had increased by almost $6 billion.

International lending through bank and bond markets to developing countries in Asia amounted to $4.9 billion in the first half of 1987, compared with $7.7 billion in 1986 as a whole. Bank lending reached $4.0 billion in the first half of 1987, compared with $4.8 billion in all of 1986, as the external position of Asian countries remained strong and some countries, such as Korea ($3.6 billion) and Malaysia ($0.6 billion) continued to reduce their level of bank indebtedness during the first half of 1987. Offsetting this decline, lending increased to Taiwan Province of China ($4.7 billion), China ($2.0 billion), India ($0.8 billion), Indonesia ($0.7 billion), and the Philippines ($0.4 billion).

Consolidated claims of U.S. banks on developing countries in Asia declined by $1.6 billion on an annualized basis (8 percent) in the first half of 1987, following a 19 percent reduction in calendar 1986. The largest decline in U.S. banks’ exposure was vis-à-vis Korea ($2.5 billion). The consolidated claims of U.K. banks, unadjusted for the impact of exchange rate movements, on developing countries in Asia increased by 3 percent in the first half of 1987 ($0.3 billion), compared with a decline of 1 percent in 1986. Claims of German banks appear to have remained roughly unchanged for this regional group, and indications are that Japanese banks substantially increased their claims on Asian countries.

Bond issues by Asian countries continued to slow as they reached $1.6 billion in the first three quarters of 1987, compared with $2.9 billion in 1986. With the exception of Malaysia, which issued almost $0.2 billion more in the first three quarters of 1987 than in 1986, all other borrowers reduced their bond issues in relation to 1986. China remained the largest borrower among all developing countries in international bond markets, accounting for about one fourth of all issues during 1986–87 and for almost half of the amounts placed by developing countries in Asia.

New long-term bank credit commitments to Asia amounted to $6.9 billion in the first three quarters of 1987, compared with $8.2 billion in calendar year 1986. As in the recent past, all commitments were on a spontaneous basis. Arrangements of other international long-term bank facilities only increased by $0.5 billion in the first three quarters of 1987, compared with $2 billion in 1986. China and Korea also issued $0.3 billion of Eurocommercial paper in 1986 but were not active on that market during the first three quarters of 1987.

Developing countries in Asia deposited $15.1 billion in international banks in the first half of 1987, two thirds more than in 1986. Interbank deposits increased by $14.4 billion, while nonbanks in Asia increased their deposits by only $0.7 billion during the first half of 1987. Banks in China ($2.0 billion), the Philippines and Thailand ($0.3 billion each), and Korea ($0.1 billion) increased their deposits. By contrast, banks in Malaysia ($1.1 billion), Indonesia ($0.9 billion), and India ($0.4 billion) reduced their deposits.

Net lending through international bank and bond markets to developing countries in Europe almost doubled during the first half of 1987, to $1.2 billion, following a decline by more than 80 percent, to $0.6 billion in 1986. Net lending by banks to these countries amounted to $0.2 billion in the first half of 1987, compared with a net repayment of $0.5 billion in 1986. Renewed activity in 1987 was more than accounted for by Hungary ($0.9 billion) and Turkey ($0.6 billion), while repayments moderated in Yugoslavia ($0.6 billion).

International bond issues by developing countries in Europe were particularly active during 1986–87. By the third quarter of 1987, bond issues had reached $1.8 billion, compared with $1.1 billion in calendar year 1986. Hungary and Portugal each issued $0.6 billion of bonds during the first three quarters of 1987, while Greece and Turkey placed $0.4 billion and $0.2 billion, respectively. European countries also arranged other international long-term bank facilities for $0.4 billion during the first three quarters of 1987, compared with $1.5 billion during calendar year 1986. No new Euro-commercial paper programs were established for these countries during this time.

Bank deposits from residents in European developing countries declined by $1.6 billion in the first half of 1987, compared with an increase of $1.2 billion in 1986. The decline during the first half of 1987 was more than accounted for by withdrawals by Hungary ($0.9 billion) and Yugoslavia ($0.9 billion), while deposits increased only from residents in Portugal ($0.5 billion) and Greece ($0.2 billion). Virtually all these transactions occurred in the interbank market.

Developing countries in Africa continued to make net repayments through international bond and credit bank markets. In the first half of 1987 such repayments amounted to $1.1 billion following net repayments of $1.8 billion in 1986. Repayments to banks amounted to $1.1 billion in the first half of 1987, as the result of sizable repayments by Algeria ($0.6 billion), South Africa ($0.2 billion), and Nigeria ($0.3 billion) after repayments of $1.8 billion in 1986. Following a decline of 20 percent in 1986, U.S. banks reduced their exposure vis-à-vis African countries by only $0.1 billion (1.6 percent) in the first half of 1987. The decline in the first half of 1987, however, was offset by an equivalent increase in the consolidated position of U.K. banks.

During the first three quarters of 1987, African countries, for the first time in many years, did not issue any bonds. This decline is explained in large part by the absence of South Africa and Algeria from international bond markets. New spontaneous long-term international credit commitments to developing countries in Africa also declined in the first three quarters of 1987 to only $0.4 billion, compared with $1.4 billion in 1986. No concerted lending commitments were made in the first three quarters of 1987 following the 1986 agreements for Nigeria ($0.3 billion) and the Congo ($0.1 billion). Other international long-term bank facilities did not play a role in the financing of African countries in 1986 or the first three quarters of 1987; the last such facility was arranged in 1984.

In contrast with 1986, when residents of Africa reduced their deposits with international banks by $0.7 billion, these deposits were increased by $0.8 billion during the first half of 1987. The increase in deposits of nonbanks in Africa more than offset the decline in interbank deposits during the first half of 1987.

Developing countries in the Middle East borrowed net $0.2 billion from international banks in the first half of 1987 following significant repayments of $2.4 billion in 1986. The net borrowing from banks during the first half of 1987 was more than accounted for by bank lending to Saudi Arabia ($1.3 billion). Middle Eastern countries did not issue international bonds in 1986, but during the first three quarters of 1987, Israel issued $35 million of such bonds.

Reflecting a strengthening in export earnings and an accumulation in international reserves, deposits from Middle Eastern residents with international banks increased by $2.6 billion in the first half of 1987 compared with a decline of $15.0 billion in 1986. Most of the increase in deposits originated from nonbanks whose deposits increased by $2.3 billion, particularly from nonbanks in the United Arab Emirates ($1.4 billion) and Kuwait ($1.2 billion).

Distribution of Lending by Nationality of Banks

The evolution of banks’ claims on developing countries displayed diverging patterns in 1986 and the first half of 1987, depending on the nationality of creditor banks. The reduction in U.S. banks’ consolidated claims on developing countries continued during the first half of 1987, albeit at a decelerated pace. On an annualized basis, these banks’ claims declined half as fast during the first half of 1987 as in calendar year 1986 (9.4 percent); U.S. banks’ claims on developing countries were reduced by $7 billion during the first half of 1987, compared with a drop of $13.5 billion in 1986. Reductions in claims on developing countries in Africa, Asia, Europe, and the Middle East were in the range of 2 percent to 13 percent during the first half of 1987, with the exception of the Middle East, where the rate of decline remained close to 20 percent. The behavior of the different types of U.S. banks vis-à-vis developing countries as a whole was fairly uniform during 1986–87, with the 9 and 15 largest banks reducing their claims at a similar pace, although the remaining banks reduced their claims at a somewhat faster pace. Adjusted for guarantees and other risk transfers, U.S. banks’ risk exposure to developing countries declined from a peak of $150 billion in 1983 to $118 billion in mid-1987—a reduction of 21 percent. The decline in risk exposure amounted to 6.4 percent on an annual basis during the first half of 1987 after a decline of 8.5 percent a year in 1985 and 1986 (Table 35).

Consolidated claims of U.K. banks, unadjusted for exchange rate changes, increased by $2 billion in the first half of 1987 (2.9 percent), considerably more than during all of 1986 ($0.6 billion, 0.9 percent). These increases, however, were probably affected by exchange rate movements, as the pound sterling appreciated strongly vis-à-vis the U.S. dollar. With the exception of Europe, claims of U.K. banks increased in all regions during the first half of 1987. Prominent increases in U.K. banks’ claims were observed in the Middle East, the Western Hemisphere, and Asia.

German banks seem to have continued to reduce their claims on developing countries during 1986 and the first half of 1987. Claims on Western Hemisphere countries and also on African countries appear to have been reduced again during the first half of 1987, while those on Asian countries seem to have been reduced for the first time. Claims on European developing countries may again have increased slightly. Information on the breakdown of Japanese bank claims by region is not published; however, a comparison of lending by other major nationality groups of banks suggests a marked increase in Japanese banks’ claims in Asian countries. Claims on other regions appear not to have changed significantly.

Terms

Terms on new bank commitments and debt restructurings continued to ease through the first three quarters of 1987. Differences persisted, particularly with regard to spreads, for spontaneous and concerted commitments. Average spreads on new bank credit commitments to developing countries edged up to 70 basis points during the first half of 1987, according to OECD data, after declining to 63 basis points in 1986, from a peak of 154 basis points in 1983 (Table 36 and Chart 10). The marginal increase in spreads in 1987 was a statistical artifact owing largely to changing shares of concerted and spontaneous lending; concerted spreads on spontaneous commitments continued to declined in 1987, while spreads on concerted commitment were virtually unchanged in 1987 from 1986. Spreads on spontaneous bank credit commitments fell to 38 basis points during the first three quarters of 1987 from 67 basis points in 1986. The difference between spreads on spontaneous bank credit commitments to developing and industrial countries decreased to 13 basis points during the first three quarters of 1987 from 31 basis points in 1986, continuing the narrowing in spreads that began in 1984. Spreads on concerted commitments rose to 87½ basis points during the first three quarters of 1987 (Argentina) from 84 basis points in 1986 as a whole; spreads on concerted commitments remained significantly below the average of 225 basis points recorded in 1983.

Chart 10.
Chart 10.

Terms on International Bank Lending Commitments, 1976–Third Quarter 1987

Sources: Organization for Economic Cooperation and Development, Financial Market Trends; International Monetary Fund, International Financial Statistics; and Fund staff estimates.1 New publicized long-term international bank credit commitments.

The average maturity of new bank credit commitments to developing countries lengthened considerably during the first three quarters of 1987 to about eleven years and two months from eight years and two months in 1986. This lengthening was due primarily to longer maturities related to concerted commitments; maturities on spontaneous commitments increased by only four months to eight years eight months during the first three quarters of 1987 from 1986. Maturities on spontaneous commitments to developing countries during the first three quarters of 1987 were two years and eight months longer than maturities for industrial countries. This implied a substantial widening of the differential, reflecting both the lengthening of maturities for developing countries and the one-year shortening of maturities for industrial countries.

On average, spreads under restructuring agreements increased marginally to 99 points in the first three quarters of 1987 after having fallen to 96 basis points in 1986 from 195 basis points in 1983 (Table 7). The easing of spreads was particularly marked for Western Hemisphere countries and continued through the first half of 1987 to an average of 87 basis points from almost 200 basis points in 1983. By contrast, in Africa the spread on recent reschedulings remained well in excess of 100 basis points. For Nigeria, the spread agreed in the agreement in principle in November 1986 was for 125 basis points, while for Morocco, the December 1986 agreement in principle fixed a spread

Table 7.

Terms of Selected Bank Debt Restructurings and Financial Packages, 1983–Third Quarter 19871

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Source: Table 37.

Classified by year of agreement in principle.

New trade credit and deposit facility.

Amendment to previous reschedulings or new money packages.

Multiyear debt restructuring agreement.

Amendments to 1983–87 restructuring agreement and 1988–91 unrescheduled original maturities.

Growth contingency cofinancing with the World Bank.

Contingent investment support facility.

Of private financial and private corporate sector debt, except for private corporate sector debt due in 1990–92 under the 1985 restructuring agreement. The latter maturities are restructured at public sector terms.