Over the past five years, bonds placed by developing countries in international markets have accounted for a substantial portion of the funds raised by these countries. Historically, bonds were the predominant means by which countries raised foreign financing. Only during the 1970s, when relatively small amounts of bonds were issued, did bank lending play a predominant role. In order to put recent developments in perspective, the paper reviews experiences with bond financing in the early part of this century and in the 1970s and early 1980s.
The paper examines the sources and role played by bonds in providing financing to developing countries in the early part of this century. Also examined are the payments difficulties encountered during the 1930s, and the steps taken to resolve them. During that decade, a number of countries partially or totally defaulted on their foreign bonds. These defaults were generally settled through protracted formal negotiations between the debtor countries and representatives of the bondholders. In most cases it took more than five years, and in a few instances more than ten years, to reach a debt-restructuring agreement. As a result, most of the countries that defaulted on bond obligations during the 1930s took almost forty years to regain substantial access to international capital markets; when they did re-establish access in the 1970s, these countries generally had to pay higher rates than other developing countries.
During the 1970s and early 1980s, developing countries issued only a limited number of bonds; by the mid-1980s, bond debt amounted to only $1/ billion, During the ensuing debt crisis, the incidence of payments difficulties on these bonds was small relative to other forms of debt, perhaps pointing to some preferential treatment afforded by developing countries to bonds. The paper describes a distinctive feature of the restructurings that did take place: in lieu of extended, formal negotiations between debtors and bondholders or their representatives, debtor countries made unilateral offers based on informal contacts with creditors. Exchanges of new bonds for defaulted ones were made at par, and interest rates on the new instruments were generally higher than on the original bonds, although maturities were longer.
The paper finds that, after these defaults, new access to international markets has been quite limited for all of the countries that restructured bonds in the 1980s and 1990s. Where countries have managed to raise new funds, the amounts involved have been small, the interest rate premiums high, and the maturities short.