Chapter

Appendix I: Bank Lending in 1980

Author(s):
International Monetary Fund
Published Date:
August 1981
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At the end of 1980, international bank claims32 amounted to some $810 billion. Despite widespread expectations of a deceleration in international bank lending in 1980, the volume of net lending33 amounted to $165 billion, compared with $130 billion in 1979. The resulting increase in outstanding claims (exchange rate adjusted) was about 25 per cent, a slightly higher growth rate than in 1979. Despite the concerns expressed at the beginning of 1980 about a slowdown in lending to some of the non-oil developing countries, the distribution of lending in 1980 was not greatly changed from previous years. The pronounced easing of terms that had persisted for several years appears to have come to an end in 1980; with the exception of a few cases, however, terms did not harden significantly, at least on publicized medium-term credits.

This Appendix describes these developments in detail and gives background information on the factors accounting for them.

Environment for International Lending in 1980

World economic developments are related to the volume, direction, and terms of international intermediation by banks in a variety of ways. International banking can best be viewed as one component of global banking, of which purely domestic intermediation is much the larger component. Part of the demand for international bank lending (and deposit taking) may be ascribed to developments that are themselves international in character, such as loans to finance current account deficits or reserve increases or loans to finance particular types of international transactions, mainly international trade. With the growing integration of national financial markets, however, much of the flow of finance through international banking channels results not from a need for international finance as such, but rather represents an alternative to domestic finance.34 From this point of view, the analysis of the factors affecting international bank intermediation must take into account the factors affecting global demand for money and credit, such as the global level of economic activity. Decisions on production and investment in turn are affected by the cost and availability of credit, which can largely be explained in terms of the stance of monetary policies. While global credit demand is thus in a sense exogenous to the banking system, the efficiency of the system, as measured by the margin between lending and deposit rates, has a bearing; and the efficiency of international banks relative to domestic banking or other financial channels has a major effect on the distribution of financial flows among the various channels.

This discussion of the economic environment for bank lending in 1980 thus begins with developments related to international payments and then turns to global economic activity and monetary policies. Some aspects of these developments are summarized in Table 5.

Table 5.Growth in International Lending and Selected Economic Indicators, 1973–80(In billions of U.S. dollars and in per cent)
19731974197519761977197819791980
International lending
1. Net new international lending through bank and bond markets14159589694112151183
Bank lending335040706890130165
Growth in the stock of bank claims (per cent)22429182721212425
Bond markets89182626222118
2. Share of net external claims in total claims of banks in 14 major capital market countries (per cent)39.310.411.512.613.113.014.716.0
International payments
3. Total of identified current account deficits4-27-80-80-80-82-87-94-153
Seven large industrial countries-4-26-8-12-17-15-13-35
Other-23-54-72-68-65-72-81-118
4. Total current account surpluses of oil exporting developing countries768354031368112
5. Change in bank deposits of oil exporting developing countries
Gross3014121163844
Net of new borrowing6322-83138
6. Increase in value of world trade (per cent)37.846.04.212.713.916.125.721.8
7. Borrowing for reserve building by non-oil developing countries561-3861091
Production and investment
8. Growth in GNP of industrial countries (per cent)14.112.510.513.211.811.811.810.3
9. Growth in value of fixed investment in seven major industrial countries (per cent)7.36.04.6-1.9
Monetary developments
10. Monetary expansion in seven major industrial countries (per cent)614.810.212.111.712.312.59.98.4
11. Interest rates (six-month Eurodollar deposit rate, in per cent)9.311.27.66.16.49.412.014.2
Sources: BIS; World Bank; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

Net of double-counting due to bank purchases of bonds.

Adjusted for valuation effects of exchange rate changes.

External claims (net of redepositing among banks in the BIS reporting area) and total assets of banks of 14 major capital market countries: Group of Ten countries plus Austria, Denmark, Ireland, and Switzerland.

Goods, services, and private transfers. Includes all nonmember countries of the Fund.

Defined as the increase in foreign exchange reserves of these countries, less the total of their current account surpluses.

Weighted average (1979 weights) of growth rate of money plus quasi-money.

Sources: BIS; World Bank; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

Net of double-counting due to bank purchases of bonds.

Adjusted for valuation effects of exchange rate changes.

External claims (net of redepositing among banks in the BIS reporting area) and total assets of banks of 14 major capital market countries: Group of Ten countries plus Austria, Denmark, Ireland, and Switzerland.

Goods, services, and private transfers. Includes all nonmember countries of the Fund.

Defined as the increase in foreign exchange reserves of these countries, less the total of their current account surpluses.

Weighted average (1979 weights) of growth rate of money plus quasi-money.

International Payments

A major element in the demand for international intermediation in 1980 by banks was the increased requirement for balance of payments finance associated with the oil price increases of 1979–80. The increase in the total of current account deficits of industrial and non-oil developing countries and centrally planned economies, from $87 billion in 1978 to $153 billion in 1980 (Table 5, line 3), was a major source of incremental demand.35 At the same time the flow of oil exporters’ deposits to banks, net of new borrowing, reversed from a withdrawal of $8 billion to a placement of $38 billion as the aggregate current account surplus increased from $3 billion in 1978 to $112 billion in 1980 (Table 5, lines 4 and 5), reflecting the large increase in income and wealth and the high short-run marginal propensity to save of oil exporting countries.

The increase in the value of world trade from year to year (Table 5, line 6) carries with it a need for increased trade finance, much of which comes from banks. This need normally arises more or less independently of the total of current account deficits—from 1974 to 1977, for example, there was virtually no change in the total of deficits, but the value of world trade almost doubled—but in 1979–80 the fact that much of the increase in deficits was associated with a higher value of imports meant that a substantial part of the requirement for balance of payments finance could be met through bank trade credit. This was perhaps most strongly evident in Japan. The fact that banks’ readiness to provide short-term trade-related credit is less constrained by prudential considerations than is their readiness to provide medium-term credit enhanced the international role of banks in this period.

Borrowing for the augmentation of international reserves36 was a significant factor in the demand for international bank credit in the second half of the 1970s, at least on the part of the non-oil developing countries. In 1980, however, borrowing for reserve accumulation fell to $1 billion (Table 5, line 7), from an annual average of $8 billion in 1976–79. This reflected the much higher financing needs of most of the non-oil developing countries in 1980 and the tighter terms faced by some borrowers.

Exchange market instability tends to increase banks’ external assets and liabilities because of increased speculative borrowing and hedging operations. These positions are generally reversed once exchange markets calm down. Exchange rates have exhibited a high sensitivity with respect to changes in uncovered interest rate differentials, which were relatively large in 1980. Some of the speculative positions established in connection with the substantial exchange rate changes in late 1980 may not have been unwound by the end of the year in the expectation of further substantial exchange rate changes. This was in some contrast with the relative calm in the foreign exchange markets in late 1979 and may have contributed to an increase in bank claims between the two year-ends.

Production and Investment

Much of the demand for money and credit on a global basis is associated with developments in production and investment. With the growing international integration of national economies, much of this demand spills over into international channels, so that such developments, particularly in the industrial countries, have an impact on international lending. In 1980 incremental demand arising from this source was weak relative to 1979. The growth of nominal gross national product (GNP) in 1980 in the industrial countries slowed by about 1.5 percentage points (Table 5, line 8), reflecting a decline of more than 2 per cent in real GNP, which was partly offset by a 1 per cent increase in GNP deflators. The value of fixed investment, which had risen by 4.6 per cent in 1979, declined by 1.9 per cent in 1980 (Table 5, line 9).

The effect of the slowdown of economic activity in the industrial countries may have been greater on domestic credit than on international lending. An increasing proportion of the credit requirements of industrial country borrowers was met internationally, as the already high relative efficiency of the international credit markets was enhanced by the impact of high interest rates. The principal reasons for the increased shifting offshore of the booking of transactions are discussed below.

Monetary Developments

In the absence of capital controls, interest rates in the international money markets for particular currencies move closely in line with those in the domestic markets. International lending and deposit rates, in turn, closely follow the money market rates, after allowance is made for the margin required by banks to cover their cost, including risk. While these margins change over time, sometimes abruptly, fluctuations in money market rates, which reflect monetary developments and policies in the major capital market countries, are a more important factor in changes in the total cost of credit. With slower monetary growth in industrial countries in 1980 (Table 5, line 10), interest rates were generally higher. The average six-month Eurodollar deposit rate, for example, rose from 12.0 per cent in 1979 to 14.2 per cent in 1980 (line 11), and ex post real interest rates were generally significantly positive. These developments presumably tended to reduce the demand for domestic and international bank credit in 1980, particularly on the part of private borrowers in industrial countries. The demand for medium-term international bank credit by sovereign borrowers is probably less interest elastic, at least in the shorter run.

Another effect of high interest rates is that they tend to encourage the shift in the booking of deposits and loans offshore to take advantage of the lower costs of such international intermediation (often referred to as the round tripping of funds). The generally higher level of interest rates in 1980 magnified the cost advantages to depositors and borrowers in placing or borrowing funds in the Euromarkets rather than in domestic markets; this cost differential stems from the noninterest-bearing reserve requirement applied for banks’ domestic liabilities in many capital market countries. Other elements of monetary policy in the United States and the United Kingdom that also affected offshore intermediation in 1980 are reviewed below.

The factors discussed here have mainly had a bearing on the demand for international intermediation, although in some respects they also affect supply—for example, weak demand for domestic credit may encourage banks to seek international lending opportunities. By and large, however, the extent to which banks are willing to carry out intermediation is related to prudential considerations, which have been discussed at some length in Section III of this paper.

Bank Lending and Deposit Taking37

Industrial Countries

Net bank lending to industrial countries rose from $71 billion in 1979 to an estimated $100 billion in 1980 (Table 6), an increase reflecting the continuing integration of capital markets as well as the need to finance much larger current account deficits. The deterioration of their external payments positions led a number of industrial countries to increase public sector borrowing from foreign banks, while in some other countries the external situation, together with the stance of domestic financial policy, led to the emergence of domestic banks or the nonbank private sector as large borrowers from foreign banks. Much of this additional borrowing was related to trade, but syndicated medium-term credits also rose substantially.

Table 6.External Lending and Deposit Taking1 of Banks in the BIS Reporting Area,2 1977–80(In billions of U.S. dollars)
19803
197719781979First QuarterSecond QuarterThird QuarterFourth Quarter1980
Destination of lending4689013015653035165
Industrial countries39407122371316100
Oil exporting developing countries9147-43246
Non-oil developing countries142541118131452
Centrally planned economies5477-4422
International organizations and unallocated244315
Sources of funds4689013015653035165
Industrial countries4165688401730108
Oil exporting developing countries1163810169444
Non-oil developing countries131515-474-17
Centrally planned economies525-312
International organizations and unallocated325427
Change in net claims6
On industrial countries-2-25314-3-4-14-8
On oil exporting developing countries-28-31-14-13-7-38
On non-oil developing countries11026511101545
On centrally planned economies5452-14-12
International organizations and unallocated-12-1-411-2
Sources: BIS and Fund staff estimates.

The data on lending and deposit-taking are derived from stock data on banks’ claims and liabilities (net of redepositing among banks in the BIS reporting area) including an adjustment for valuation changes due to exchange rate changes. The adjustment of the overall claims and liabilities is based on information contained in BIS quarterly press releases, while the distribution of the adjusted flows among the major groups of borrowers and depositors is a Fund staff estimate.

The BIS reporting area comprises all banks in the Group of Ten countries, Austria, Denmark, Ireland, and Switzerland and the branches of U.S. banks in the Bahamas, the Cayman Islands, Panama, Lebanon, Hong Kong, and Singapore.

Not adjusted for valuation changes due to exchange rate changes.

The breakdown by major groups of borrowers (depositors) was derived from BIS data in the following manner. For industrial countries, gross claims (liabilities) were reduced by redepositing among banks in the reporting area but increased by claims on (liabilities to) offshore centers. The latter thus were assumed, in the absence of the availability of a country breakdown of the onlending from (deposit taking by) offshore centers, to represent lending to (deposit taking from) industrial countries. For the other groups of borrowers and depositors, net claims (liabilities) were taken to be equivalent to gross claims (liabilities).

Excludes Fund member countries.

Lending minus sources of funds.

Sources: BIS and Fund staff estimates.

The data on lending and deposit-taking are derived from stock data on banks’ claims and liabilities (net of redepositing among banks in the BIS reporting area) including an adjustment for valuation changes due to exchange rate changes. The adjustment of the overall claims and liabilities is based on information contained in BIS quarterly press releases, while the distribution of the adjusted flows among the major groups of borrowers and depositors is a Fund staff estimate.

The BIS reporting area comprises all banks in the Group of Ten countries, Austria, Denmark, Ireland, and Switzerland and the branches of U.S. banks in the Bahamas, the Cayman Islands, Panama, Lebanon, Hong Kong, and Singapore.

Not adjusted for valuation changes due to exchange rate changes.

The breakdown by major groups of borrowers (depositors) was derived from BIS data in the following manner. For industrial countries, gross claims (liabilities) were reduced by redepositing among banks in the reporting area but increased by claims on (liabilities to) offshore centers. The latter thus were assumed, in the absence of the availability of a country breakdown of the onlending from (deposit taking by) offshore centers, to represent lending to (deposit taking from) industrial countries. For the other groups of borrowers and depositors, net claims (liabilities) were taken to be equivalent to gross claims (liabilities).

Excludes Fund member countries.

Lending minus sources of funds.

Most of the borrowing from foreign banks by industrial countries in 1980 occurred in the first half of the year, as economic activity weakened during the year and certain special factors affecting the financial markets of the United States and the United Kingdom were less important in the second half.

International bank lending to individual industrial countries cannot be established precisely from the data available,38 but some tentative conclusions can be drawn from incomplete data.39 Foreign bank lending to the nonbank sectors in the Federal Republic of Germany, Italy, Sweden, and some other European deficit countries was strong (see Table 25). A sizable amount of foreign funds was also channeled through banks in Europe for domestic onlending. This is indicated by the substantial increase in the net foreign liability position of the banks in most European countries in 1980 (see Table 26). An exception was German banks, whose position was affected by a reduction in nonresident deposits in deutsche mark in reaction to changing exchange rate expectations. Japanese banks were also large borrowers of foreign funds, mainly for domestic onlending for import finance and other purposes.40 Their net foreign liabilities, which had remained virtually unchanged in 1979, rose by $9 billion in 1980.

Foreign bank lending to the United Kingdom and the United States—two countries with sizable current account surpluses in 1980—was influenced to a considerable extent by special effects of interest rate developments and monetary policy measures giving rise to increased offshore intermediation of funds. In the case of the United Kingdom, the volume of offshore intermediation of sterling was relatively high in late 1979 and the first half of 1980. With the elimination of exchange control, nonbanks were free to place deposits abroad, while at the same time the supplementary special deposit requirement (the so-called corset)41 on U.K. banks, which effectively constrained their domestic booking of sterling loans, provided an incentive to borrow sterling from abroad. Borrowing from banks abroad by the U.K. nonbank sector fell after the corset was removed (see Table 25). The relatively sizable borrowing by the U.S. nonbank sector from banks in Europe in the first quarter of 1980 may have reflected not only the strength of the domestic economy, but also intermediation shifting offshore due to high interest rates (see Table 25). To satisfy strong domestic credit demand, U.S. banks also borrowed sizable amounts from foreign banks, including their own foreign branches, in the first quarter of 1980.42 In the second quarter and part of the third quarter of 1980, the non-bank sector in the United States continued to be a relatively large borrower of foreign bank funds in response to the domestic credit controls in effect in the period March-June 1980 and the steeper decline of Eurodollar interest rates than the U.S. prime rate.

Industrial countries have been the main suppliers of funds to the international banking system, except for short periods immediately following major increases in oil prices. This is, of course, primarily a reflection of the large amount of savings generated by the industrial countries. In a sense, moreover, the industrial countries are the residual suppliers of funds to the international banking system; that part of the international lending of banks not funded by deposits from developing and centrally planned economies and by deposits from industrial countries held in offshore centers is by definition funded by deposits from inside the industrial countries. The availability of such funds is generally not in question—at some interest rate, banks can obtain the funds they need by borrowing either in their domestic markets or in other industrial countries.

The use of funds from industrial countries for banks’ international lending activity in 1980 amounted to $108 billion, compared with $65 billion in 197943—a growth reflecting the lower inflow of funds from non-oil developing countries and centrally planned economies and the sharp slowdown in fresh bank deposits by oil surplus countries during 1980. On a net basis, industrial countries were net users of international bank funds in 1979 ($3 billion) and in the first quarter of 1980 ($14 billion) but emerged again as large net suppliers of funds in the period April-December 1980 ($22 billion).

Oil Exporting Countries

Total new deposits by oil exporting countries, which amounted to $6 billion in 1978 and $38 billion in 1979, are estimated to have reached about $44 billion in 198044 (Table 6). The inflow of new deposits reached a peak of $16 billion in the second quarter of 1980, thereafter decelerating markedly to $4 billion in the final quarter of 198045 (Table 6). To some extent the deceleration may have reflected some diminution of those countries’ current account surplus, but a more important factor was the increase in direct recycling—bilateral lending to governments, purchases of securities in the markets and direct investment abroad. Expressed as a percentage of the estimated total cash surplus of oil surplus countries, the increase in bank deposits fell from 58 per cent in 1979 to 35 per cent in 1980 (see Table 27),46 repeating the pattern observed in 1974–75. Net repayments of bank loans by oil exporting countries were large ($4 billion) in the first three months of 1980, but a resumption in borrowing thereafter resulted in total borrowing of $6 billion for the year.

The net supply of funds (deposits less loans) by oil surplus countries in 1980 is estimated at about $38 billion, compared with $31 billion in 1979, but the sharp slowdown of deposits in the fourth quarter of the year, together with the increase in banks’ lending, meant that in that quarter the oil exporting countries were no longer a net supplier of funds. The stock of deposits by oil exporting countries with foreign banks reached about $155 billion at the end of 1980, almost double the level in December 1978 (see Table 28); bank net liabilities to them more than tripled over the same period to reach $90 billion at the end of 1980 (see Table 29).

Centrally Planned Economies47

International bank lending to centrally planned economies fell from $7 billion in 1979 to $2 billion in 1980 (Table 6). This reflected mainly much lower lending to Poland, the largest borrower among centrally planned economies, whose economic situation deteriorated in 1980. Lending to other Eastern European countries seems to have been little affected by the crisis surrounding Poland’s external debt but undoubtedly was influenced by East-West tensions. Some countries reduced their outstanding debt to banks in the first quarter and drew down their deposits, but bank lending, particularly to Hungary, the German Democratic Republic, and Czechoslovakia, mainly in the form of short-term credits, resumed in the second quarter of 1980, and deposits were also rebuilt to the level at the outset of the year. The net debtor position of centrally planned economies vis-à-vis banks increased by $2 billion in 1980.

Non-Oil Developing Countries

Bank lending to non-oil developing countries in 1980 amounted to about $52 billion, compared with $41 billion in 1979 (Table 6). In the early part of the year, banks were reluctant48 to maintain the pace of their lending to many of the non-oil developing countries at the then prevailing level of spreads. Since the borrowers were reluctant to accept any significant tightening of terms, the result was a postponement of action on both sides. Borrowing from banks by non-oil developing countries thus amounted to only $1 billion (not adjusted for valuation changes) in the first quarter of 1980. As the year progressed, some borrowers did acquiesce to tighter terms in order to obtain the necessary financing, while others found banks more prepared to lend at the prevailing level of spreads. Bank claims thus grew at a quarterly rate around $15 billion a quarter in the last three quarters of 1980.

To compensate for the relatively small amount of bank borrowing in the first quarter of the year, some non-oil developing countries reduced substantially their deposits with banks (Table 6 and also see Table 28). The withdrawal of deposits again gave way to an accumulation in mid-1980, but a further small reduction took place in the fourth quarter. The net flow of funds from banks to such countries rose from about $5 billion in the first quarter of 1980 to $15 billion in the fourth quarter, totaling some $45 billion for the year. These figures may significantly understate the actual flow, as the banks of some of the non-oil developing countries reportedly borrowed intensively through their branches in offshore centers.49

The 31.5 per cent share of non-oil developing countries in banks’ total net international lending in 1980 was unchanged from 1979, but significantly higher than in 1977 and 1978 (see Table 30). There was little change in 1980 in the distribution of lending to non-oil developing countries among the major groups of countries.50 Borrowing by the major exporters of manufactures (excluding the offshore centers, Hong Kong and Singapore) accounted for 46 per cent of banks’ total net lending to non-oil developing countries in 1980, net oil exporters (excluding the offshore center, Bahrain) for 27 per cent, and other net oil importers for 25 per cent. These shares were all somewhat higher than in 1979, while the share of borrowing by low-income countries, which have never been large market users, fell from 7 per cent in 1979 to 2 per cent in 1980. The share of banks’ claims on non-oil developing countries in their total net international claims continued to increase in 1980, reaching 29.0 per cent at the end of the year (see Table 31).

The data on outstanding bank claims on broad country groupings—and large borrowers within the country categories—presented in Table 32 indicate a sizable increase in debts to commercial banks by several countries in recent years. Of the important market borrowers identified among the non-oil developing countries, notable increases in bank claims are shown for Argentina, Brazil, Chile, Mexico, Korea, the Philippines, Greece, Venezuela, and Yugoslavia during the period 1978–80. But in several of these cases, the growth of export earnings moved apace or exceeded the growth in outstanding debt to banks. For example, the ratio of bank claims to export earnings declined between 1978 and 1980 for Brazil, Mexico, and Venezuela and was about unchanged for the Philippines and Yugoslavia. The ratio rose in the case of Argentina, Chile, Greece, and Korea. Such debt outstanding at the end of 1980 exceeded the equivalent of two years of export earnings for Argentina, Brazil, and Mexico; in the case of the last two the ratio had declined during the past two years.

Changes in the concentration of banks’ claims on the largest of the borrowing countries among the non-oil developing countries were small in 1980. Brazil and Mexico, the two largest borrowers, continued to account for a little more than one third of banks’ claims on non-oil developing countries, the largest 10 borrowers for somewhat less than 70 per cent, and the largest 20 borrowers for about 85 per cent. By geographic region, banks’ claims on non-oil developing countries in the Western Hemisphere rose by 26 per cent in 1980, while the indebtedness of non-oil developing countries in Europe increased by 29 per cent (see Table 32). Claims on countries in Asia rose by 26 per cent in 1980, and the increase in banks’ claims on countries in Africa was 10 per cent. Banks’ claims on non-oil developing countries in the Middle East rose by 20 per cent. These growth rates were close to those recorded in 1979. The share in non-oil developing countries’ total long-term external debt of debt owed or guaranteed by public institutions to banks rose to over 30 per cent in 1980, a small change compared with 1979 but more than doubling the share since 1973 (see Table 33).

Medium-Term Publicized Bank Credit Commitments

Medium-term publicized bank credit commitments amounted to $69 billion in 1980, the same level as in 1979 but somewhat lower than the $74 billion recorded in 197851 (Table 7). The stagnation in the value of new commitments at a time when total bank lending grew was due to a number of factors. One element was that, as the trend toward generally softer terms came to a halt in 1980, the incentive for borrowers to refinance existing credits disappeared, whereas the refinancing of existing loans to industrial as well as non-oil developing countries had accounted for a relatively large part of new commitments in 1978 and 1979. Another factor was that there were more unpublicized medium-term loans, either club deals or arrangements with single banks. Such loans were reportedly particularly important for those non-oil developing countries for which terms were tightening and which wished to avoid publicizing that fact. Furthermore, many loans took the form of short-term credits, particularly trade finance, whose increase was facilitated by the increase in the value of imports. The interbank disputes that arose with respect to Iranian loans at the end of 1979 also made some banks reluctant to enter large medium-term syndications, at least temporarily. Overall, the ratio of publicized new commitments of medium-term loans to total net new bank lending fell from 53 per cent in 1979 to 43 per cent in 1980.

Table 7.Medium-Term Publicized International Bank Credit Commitments, 1977–811(In billions of U.S. dollars and in per cent)
Annual Rates
19801981
1977197819791980First QuarterSecond QuarterThird QuarterFourth QuarterFirst QuarterSecond Quarter2
Industrial countries12.933.522.333.525.223.534.950.229.030.6
Oil exporting developing countries5.510.27.55.33.95.28.93.13.25.0
Non-oil-developing countries12.926.634.628.025.024.325.437.425.934.0
Centrally planned economies2.63.04.01.51.32.42.41.61.8
International organizations0.20.20.30.60.11.90.1
Other0.10.20.20.10.4
Total34.273.768.968.954.256.671.693.259.771.4
Memorandum items(In per cent)
Share of non-oil developing countries in new commitments37.736.150.240.646.142.935.540.141.647.6
Ratio of publicized medium term commitments to total net new lending45.667.053.043.1
Source: World Bank.

For a more detailed country breakdown, see Table 34.

Preliminary figures.

Source: World Bank.

For a more detailed country breakdown, see Table 34.

Preliminary figures.

Most of the factors inhibiting syndications were strongest in the early part of 1980, and new commitments thus began at a slow pace, considering the larger ex ante financing needs in 1980. The value of new commitments at annual rates was about $54 billion in the first quarter of 1980, about the same level as in the first quarter of 1979.52 New commitments remained approximately unchanged in the second quarter but gradually picked up in the rest of the year, and by the fourth quarter they were running at an annual rate of $93 billion, compared with $70 billion in the corresponding period of 1979. The sharp increase in new commitments in the fourth quarter applied to both the industrial countries and the non-oil developing countries. In the latter case, the increase coincided with a marked rise in spreads, as several borrowers seemed to have accepted the fact that larger market access implied higher spreads. Total new publicized medium-term credit commitments in the first quarter of 1981 were $60 billion at an annual rate, somewhat higher than in the first quarter of 1980 but well below the pace of the latter part of 1980. There was, however, a sharp pickup in the pace of syndications in the second quarter of 1981 as total new commitments reached $71 billion, mainly reflecting a rise in the volume of loans to non-oil developing countries.

The ratio of undisbursed credit commitments to total foreign claims of banks in the BIS reporting area had fallen from 28.8 per cent in December 1978 to 24.5 per cent by the end of 1979, as both oil exporting and non-oil developing countries drew on existing commitments. Despite the low level of publicized new medium-term loan commitments in the first half of 1980, the ratio rose by 1.5 percentage points to 26.0 per cent, mainly reflecting an increase for industrial countries53 (Table 8). A relatively large drawdown of commitments by oil exporting and non-oil developing countries in the second half reduced the overall ratio to 23.4 per cent by the end of 1980.

Table 8.Undisbursed Credits as Per Cent of Outstanding Bank Claims, 1978–80(In per cent)
197819791980
JuneDecemberJuneDecemberJuneDecember
Industrial countries (other than Group of Ten, Austria, Ireland, and Switzerland)24.922.624.621.928.131.2
Oil exporting developing countries36.932.935.829.328.124.8
Non-oil developing countries29.330.533.026.327.223.2
Centrally planned economies22.623.529.716.917.015.5
All countries28.928.831.824.526.023.4
Source: Table 35.
Source: Table 35.

The total value of new credit commitments to industrial countries was over $33 billion in 1980, compared with $22 billion in 1979 (Table 7). Much larger borrowing by Canada and Italy (whose current account position turned from a substantial surplus in 1979 to a large deficit in 1980) accounted for most of this increase (see Table 34). As in 1979, Belgium, Denmark, Spain, and Sweden, most of which had larger current account deficits in 1980, were large borrowers. New commitments to non-oil developing countries fell from $35 billion in 1979 to $28 billion in 1980. Such countries’ share of new commitments declined from the relatively high level of 50 per cent in 1979—the average share was 37 per cent in 1977–78—to just over 40 per cent in 1980. This decline is largely explained by a reduction in new commitments to a few large borrowers, notably Brazil, China, and Mexico (see Table 34). On the other hand, Malaysia and Thailand together borrowed about $1.5 billion more in 1980 than in 1979. Oil exporting developing countries reduced their new medium-term borrowing from $7.5 billion in 1979 to about $5 billion in 1980, mainly on account of lower new commitments to Algeria and Nigeria. The centrally planned economies were absent from the medium-term credit market in the early part of 1980, and new commitments in 1980 as a whole fell to $1.5 billion, compared with $4.0 billion in 1979.

Terms and Conditions

Developments in the terms of borrowing in international banking markets in 1980 were characterized by a rise in average interest rates, a larger differentiation between borrowers as expressed in a wider dispersion of lending spreads, and generally shorter maturities on new loans.

Interest rates reached historic peaks in some capital market countries in 1980, reflecting tighter monetary conditions and expectations of continued high inflation. U.S. dollar interest rates as measured by the three-month Eurodollar deposit rate reached a peak of close to 20 per cent in March 1980 and climbed again to over 18 per cent in the fourth quarter, after having fallen below 10 per cent in June 1980. The average three-month Eurodollar rate amounted to 14.4 per cent in 1980, compared with 12.0 per cent in 1979 and 8.7 per cent in 1978, and interest rates for other currencies also rose markedly in 1980 (Table 9). Deflating these interest rates with the respective GNP deflators shows a marked increase in ex post real interest rates in 1979–80 from barely positive levels in 1977–78.

Table 9.Nominal and Real Interest Rates, 1977–80(In per cent)
1977197819791980
United States
Three-month Eurodollar deposit rate6.08.712.014.4
GNP deflator5.87.38.59.0
Real interest rate10.21.33.25.0
Germany
Three-month money market rate4.43.76.79.5
GNP deflator3.83.93.95.0
Real interest rate10.6-0.22.74.3
Japan
Three-month gensaki rate25.65.15.910.7
GNP deflator5.54.02.01.9
Real interest rate10.11.13.88.6
Sources: IMF, International Financial Statistics; Deutsche Bundesbank, Monthly Report; Bank of Japan, Economic Statistics Monthly.

If i represents the nominal interest rate, p the growth of the GNP deflator, and r the ex post real interest rate, i = r + p - rp.

Bond repurchase agreements.

Sources: IMF, International Financial Statistics; Deutsche Bundesbank, Monthly Report; Bank of Japan, Economic Statistics Monthly.

If i represents the nominal interest rate, p the growth of the GNP deflator, and r the ex post real interest rate, i = r + p - rp.

Bond repurchase agreements.

A significant development in the latter part of 1980 was the more frequent use of the U.S. prime rate rather than the London interbank offered rate (LIBOR) as the reference rate for lending spreads on medium-term syndicated loans. This had the effect of increasing participation in syndications by U.S. banks, particularly the regional banks, which rely largely on their domestic deposit base for funding international loans. Banks apparently do not regard Euromarket funds and domestic deposits as perfect substitutes, perhaps because of a lingering apprehension about market segmentation. Interest rate spreads on the portion of loans based on the U.S. prime were normally set ⅛ per cent below the spread on the LIBOR-based portion, as prime, unlike LIBOR, is already a lending rate for final borrowers.

The “spread of spreads” rose during 1980. In the fourth quarter of 1980 the difference between the average spreads for borrowers in OECD countries and for those in developing countries was 47 basis points, compared with 25 basis points in the fourth quarter of 1979 (Table 10),54 This was, however, still well below the difference of 62 basis points in the fourth quarter of 1977. The wider differentiation of spreads in 1980 appears to have helped in the allocation of funds; for a number of large borrowers among non-oil developing countries, the rise in spreads was associated with an increase in syndications.

Table 10.Terms on Publicized Medium-Term Bank Credit Commitments, 1977–80(Rates in per cent)
Six-Month Eurodollar Deposit Rate1Spreads over LIBOR2
Weighted averagesMaturities
LowestAll borrowersOECD countries3CMEA countries4Other non-OECD countries5Longest (years)Average (years/months)
1977I5.6715/1686/8
II5.9415/16106/6
III6.71106/5
IV7.371.170.841.051.46107/0
1978I7.681.050.820.971.22127/9
II8.501.100.800.701.26128/4
III9.25¼-⅜0.900.720.741.15128/5
IV12.02½0.870.690.731.03158/11
1979I10.69½0.870.650.900.95158/9
II10.730.760.620.630.87189/3
III12.000.730.670.610.76157/9
IV14.56¼-⅜0.640.490.570.74159/3
1980I16.98⅜-½0.670.560.580.7815 ½8/9
II11.29⅜-½0.690.570.730.84157/8
III12.17¼-½0.680.541.170.82127/6
IV16.16¼-⅜0.750.560.961.03127/7
Sources: Morgan Guaranty Trust Company, World Financial Markets (for series on Eurodollar rate); and OECD, Financial Market Trends.

Average of month-end prime banks’ bid rates; the London interbank offered rates (LIBOR), commonly used as a basis for Eurodollar lending, are generally 0.125 per cent above bid rates.

On loans of $50 million and over, with a maturity of at least three years, completed or signed during the period; excludes tax-sparing loans.

Excluding Turkey.

Members of the Council for Mutual Economic Assistance.

Excluding the People’s Republic of China.

Sources: Morgan Guaranty Trust Company, World Financial Markets (for series on Eurodollar rate); and OECD, Financial Market Trends.

Average of month-end prime banks’ bid rates; the London interbank offered rates (LIBOR), commonly used as a basis for Eurodollar lending, are generally 0.125 per cent above bid rates.

On loans of $50 million and over, with a maturity of at least three years, completed or signed during the period; excludes tax-sparing loans.

Excluding Turkey.

Members of the Council for Mutual Economic Assistance.

Excluding the People’s Republic of China.

Average spreads on loans to industrial countries amounted to about 55 basis points in 1980, with little fluctuation within a year. This spread was higher than in the fourth quarter of 1979 but somewhat below the average of 61 basis points in 1979 as a whole. Thus, the higher volume of new lending to industrial countries was not accompanied by wider spreads, apparently reflecting what some observers have called a rush to quality. This tendency was enhanced by the decision of some of the larger U.S. banks to abandon their policy of not participating in loans with spreads below certain minimums (½ to ¾ per cent).

The weighted average spread on loans to non-oil developing countries, which had fallen steadily in 1979, rose from a low of 74 basis points in the fourth quarter of that year to 103 basis points in the fourth quarter of 1980. The increase in spreads in 1980 was, however, confined to a few large borrowers, while many other borrowers enjoyed market access on terms roughly similar to 1979. Countries which had previously borrowed very little succeeded in obtaining very fine spreads on loans that were large in relation to their outstanding liabilities to banks. This differentiation of terms appears to have mainly reflected banks’ desire for greater portfolio diversification rather than a view of the relative risk of lending.

Average maturities on new publicized medium-term credit commitments declined in the first half of 1980 and were, on average, slightly shorter in 1980 as a whole (eight and a half years) than in 1979 (eight years, ten months) (Table 10).55 A more general tendency toward shorter maturities is suggested by BIS data on the remaining maturity of international bank claims, as the share of claims with maturities of less than one year in banks’ total international claims rose in 1980 with respect to all major groups of countries with the exception of centrally planned economies (Table 11).56 Within the group of non-oil developing countries, the increase was quite significant for some of the larger borrowers.57

Table 11.Short-Term Claims1 as Per Cent of Total International Bank Claims, 1978–80(In per cent)
197819791980
DecemberJuneDecemberJuneDecember
Industrial countries (other than Group of Ten, Austria, Denmark, Ireland, and Switzerland)41.541.341.442.443.1
Oil exporting developing countries47.648.850.850.353.1
Non-oil developing countries44.342.942.843.245.5
Centrally planned economies43.645.342.037.139.1
All countries44.144.043.843.345.5
Source: Table 35.

Time remaining to maturity of one year or less.

Source: Table 35.

Time remaining to maturity of one year or less.

Lending by Location or Nationality of Bank

One of the major developments in international bank lending in 1980 was the acceleration in foreign lending by U.S. banks, whose international assets had grown rather slowly since 1977 in response to the declining profitability of international lending relative to domestic lending (Table 12).58 The previous slow growth had reflected the increased competition in international lending from banks of other countries as well as the buoyancy of credit demand in the United States. Including all interbank claims, the growth of foreign claims of U.S. banks, including those of their branches elsewhere in the BIS reporting area, decelerated from 32 per cent in 1976 to 12 per cent in 1979 but amounted to 16 per cent in 198059 (Table 12). International lending by U.S. banks rose sharply in the second quarter of 1980 and continued strong in the remainder of 1980. It is estimated that about one third of the total gross outflow of banks’ own funds ($40 billion) was lending to foreign nonbanks. About $11 billion went to foreign offices of U.S. banks, and about $15 billion was placed with foreign banks. Net foreign claims of U.S.-owned banks, including claims of their foreign branches,60 rose by 19 per cent in 1980, compared with 12 per cent in 1979 and 8 per cent in 1978.

Table 12.Growth in International Claims of Banks of Major Capital Market Countries, 1976–80(Percentage increase in claims in U.S. dollars)
19761977197819791980
Gross claims of U.S. banks in the United States and their foreign branches132.415.312.811.716.1
Net foreign claims of U.S. banks214.78.412.318.6
Consolidated foreign claims of Canadian banks313.953.031.928.945.7
Consolidated medium-term and longterm claims of Japanese banks-3.612.5135.560.816.7
Gross claims of banks located in:
Japan4.656.530.643.3
Branches of Japanese banks in the United Kingdom13.6-3.665.930.343.9
Belgium420.031.638.973.432.0
France25.028.033.825.314.6
Germany, Fed. Rep. of27.221.425.213.45.8
Luxembourg430.037.532.536.29.9
Netherlands427.223.634.621.614.2
Switzerland15.428.035.216.60.8
United Kingdom54.28.018.425.030.9
Gross claims of all banks in the BIS reporting area23.919.931.124.419.1
Sources: BIS, Quarterly Reports on International Banking Developments; Board of Governors of the Federal Reserve System, Federal Reserve Bulletin; Bank of England, Quarterly Bulletin; data provided by the Bank of Canada, the Board of Governors of the Federal Reserve System, and the Japanese Ministry of Finance; and Fund staff estimates. (See also Table 38.)

Adjusted to exclude claims on local residents of the foreign branches of U.S. banks.

Fund staff estimates. Includes claims of U.S. subsidiaries of foreign banks and excludes claims of foreign subsidiaries of U.S. banks; also includes claims of foreign branches of U.S. banks on foreign branches of other U.S. banks.

Includes local lending of foreign branches of Canadian banks but excludes all claims on foreign banks.

Foreign currency claims only.

Excludes claims of branches of foreign banks.

Sources: BIS, Quarterly Reports on International Banking Developments; Board of Governors of the Federal Reserve System, Federal Reserve Bulletin; Bank of England, Quarterly Bulletin; data provided by the Bank of Canada, the Board of Governors of the Federal Reserve System, and the Japanese Ministry of Finance; and Fund staff estimates. (See also Table 38.)

Adjusted to exclude claims on local residents of the foreign branches of U.S. banks.

Fund staff estimates. Includes claims of U.S. subsidiaries of foreign banks and excludes claims of foreign subsidiaries of U.S. banks; also includes claims of foreign branches of U.S. banks on foreign branches of other U.S. banks.

Includes local lending of foreign branches of Canadian banks but excludes all claims on foreign banks.

Foreign currency claims only.

Excludes claims of branches of foreign banks.

The increase in international lending by U.S. banks in the second quarter of 1980 was mainly the result of a weakening of domestic credit demand, but a number of other factors were also important. The imposition of a ceiling on the growth of banks’ domestic credit in March 1980 led U.S. banks to increase the volume of transactions booked abroad. The steep decline of U.S. interest rates in the second quarter of 1980 encouraged nonresidents to increase their dollar borrowing. As was discussed above, the generally high level of U.S. dollar interest rates in 1980 also created incentives for domestic U.S. intermediation to take place offshore. Another contributing factor was the decision by some of the large banks to begin to participate in loans with low spreads. Finally, the increased use of the U.S. prime rate as the reference rate on international loans improved the attractiveness to many U.S. banks of international lending.

Consolidated international claims of Canadian banks, which had been important market leaders in 1977–79, continued to grow strongly in 1980, increasing at a rate of 46 per cent.

Total international claims of Japanese banks grew strongly in 1980 despite the fact that the rate of growth of consolidated medium-term and long-term claims of Japanese banks declined from over 60 per cent in 1979 to 17 per cent in 1980. The restraint on new medium-term and long-term lending largely reflected prudential considerations, which had led to a consensus between the authorities and banks to slow medium-term and long-term lending. Short-term lending, however, was not affected by this consensus and increased substantially in 1980. The international activity of Japanese banks in London increased markedly, largely reflecting the onlending of funds raised in London to banks in Japan.

Data on the consolidated position of head offices and foreign branches of European banks are not available. This limits the analysis of the international activity of these banks to a review based on the geographic location of the bank (head office, subsidiary, or branch) where the loan is booked. The validity of this analysis is further limited by the inclusion of interbank claims that may distort the picture of flows to final borrowers.

The growth of international claims of banks in most European countries slowed in 1980, although the slowdown as recorded in Table 12 is somewhat exaggerated by the effect of the appreciation of the U.S. dollar on the U.S. dollar value of domestic currency claims. The lower rate of expansion of foreign claims of banks in the Federal Republic of Germany was partly related to the anticipated requirement of balance sheet consolidation for German banks. The poor profits of some large German banks—mainly the consequence of the high proportion of assets at fixed interest rates—may also have dampened their lending activity. Another factor was the generally lower lending to Eastern Europe, where German banks had a relatively large exposure. The December 1980 gentlemen’s agreement between the Deutsche Bundesbank and German banks, limiting new foreign lending from the Federal Republic of Germany at fixed interest rates and with maturities of four years and over, had only a limited impact in 1980. For Swiss banks, balance sheet consolidaion of foreign subsidiaries and head offices may have played a role in the slowdown of their lending, as capital requirements in Luxembourg and other offshore centers are lower than in Switzerland, although the impact of the change in regulations was cushioned by modifications of the previous requirements and by permitting a gradual approach to meeting the new requirements. Because much of the international lending of German and Swiss banks is channeled through their Luxembourg subsidiaries, foreign lending by banks in Luxembourg also slowed. The slowdown was also partly due to low credit demand in Germany, as a sizable number of loans to German industry from German banks are channeled through Luxembourg subsidiaries.

The rate of growth in international assets of banks in France and the Netherlands also fell substantially in 1980. On the other hand, U.K. banks increased their international claims booked in the United Kingdom at a somewhat faster pace in 1980 than in 1979, to some extent reflecting the removal of exchange controls in late 1979 and of the so-called corset in mid-1980.

The Eurocurrency Market and International Claims of Banks Outside the BIS Reporting Area

The analysis of international banking flows in this Appendix has largely been in terms of BIS data on international lending by banks in the BIS reporting area (net of interbank lending within the reporting area), which includes the Group of Ten countries, Austria, Denmark, Ireland, and Switzerland, and the branches of U.S. banks in the Bahamas, the Cayman Islands, Panama, Lebanon, Hong Kong, and Singapore. Other data series help to indicate the scope and significance of those data (Table 13).

Table 13.The Eurocurrency Market and International Claims of Banks Inside and Outside the BIS Reporting Area, 1976–80(In billions of U.S. dollars and in per cent)
19761977197819791980
Gross foreign claims of banks in the BIS reporting area5486908931,1111,323
Growth in per cent123.919.931.124.419.1
Eurocurrency market2305385502640751
Growth in per cent18.222.630.427.517.3
Other243305391471572
Growth in per cent132.116.532.120.521.4
Gross claims of banks in certain offshore centers outside the BIS reporting area377107135175
Growth in per cent39.026.228.1
Gross foreign claims of deposit money banks, IFS series6848591,1231,4131,685
Growth in per cent23.025.630.725.619.3
Source: BIS; IMF, International Financial Statistics; and Fund staff estimates.

Growth rates do not always correspond to stock figures because of breaks in the data series.

Foreign currency claims of banks in Europe.

Claims of non-U.S. banks in the Bahamas, the Cayman Islands, Panama, Lebanon, Hong Kong, and Singapore, and claims of all banks in Bahrain and the Netherlands Antilles.

Source: BIS; IMF, International Financial Statistics; and Fund staff estimates.

Growth rates do not always correspond to stock figures because of breaks in the data series.

Foreign currency claims of banks in Europe.

Claims of non-U.S. banks in the Bahamas, the Cayman Islands, Panama, Lebanon, Hong Kong, and Singapore, and claims of all banks in Bahrain and the Netherlands Antilles.

The collection of data on international bank lending had its origins in the early 1960s with the BIS statistics on Eurodollar lending. The narrowly defined Eurocurrency market, which is limited to the international claims and liabilities in foreign currency of banks in Europe, continues to account for over half of international bank claims in the BIS reporting area. Some types of data are available for the Eurocurrency market which are not available for the more broadly defined market, such as the currency distribution of claims. The U.S. dollar has maintained its dominant position in the market, accounting for about 70 per cent of claims.

A sizable and probably also increasing part of international lending is carried out through banks that are not located in the traditional BIS reporting area. Some of this activity is captured in the data—recently published by the BIS for the first time—on gross international claims of non-U.S. banks in certain offshore centers (the Bahamas, the Cayman Islands, Panama, Lebanon, Hong Kong, and Singapore) and of all banks in other offshore centers (Bahrain and the Netherlands Antilles), which have been outside the traditional reporting area. International claims of these banks have risen faster than the foreign claims of banks inside the BIS reporting area. The additional amount of net international lending involved is probably not very substantial because most of it represents onlending of funds obtained from within the BIS reporting area and is thus already included in BIS net claims.

An indication of the global scale of international banking comes from the series on international bank claims published in International Financial Statistics (IFS), a monthly publication of the Fund. These data suggest that banks in the BIS reporting area account for slightly less than 80 per cent of global gross claims, a proportion that has declined slightly over the last five years. Data are not available on net lending by the banks included in the IFS series, but the proportion accounted for by banks in the BIS reporting area is likely to be substantially higher than for the gross series.

Financing of Payments Imbalances Through International Capital Markets61

Global Payments Imbalances and Flows Through International Capital Markets

The oil price increases of 1973–74 and 1979–80 resulted in a sharp widening of global payments imbalances and a dramatic shift in the pattern of external payments positions of the main groups of countries. For the international capital markets, the change in relative prices meant a much larger ex ante demand for balance of payments financing by oil importing industrial and developing countries; it also meant a much larger inflow of funds to banks from oil exporting countries once the deficits of the oil importing countries were financed.

In 1973 net lending through private international capital markets had amounted to about $40 billion annually, while the global sum of current account deficits was less than $30 billion (Table 14). In 1974 the current account surplus of the oil importing countries increased tenfold to $68 billion, and the global sum of deficits rose to $80 billion. These increases were accompanied by a 50 per cent increase, to about $60 billion, in net foreign lending through manking and bond markets. Most of the additional private market finance was provided by banks, whose net international claims rose by about 30 per cent in 1974.

Table 14.Financial Flows Through International Capital Markets, 1973–80(In billions of U.S. dollars)
19731974197519761977197819791980
New bank lending (net)1335040706890130165
Lending through bond markets2811203031303028
Less double counting due to banks’ acquisition of bonds122458910
Total financing through private markets4059589694112151183
Memorandum items
Medium-term publicized credit commitments2129212934746969
Accumulation of deposits by oil exporting developing countries3014121163844
Current account surplus of oil exporting developing countries768354031368112
Global sum of current account deficits-27-80-80-80-82-87-94-153
Sources: BIS; World Bank; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

Net of redepositing among banks.

Net of redemptions.

Sources: BIS; World Bank; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

Net of redepositing among banks.

Net of redemptions.

In 1975 the current account surplus of the oil exporting countries declined sharply, but with economic recession in the industrial countries, the current account deficits of non-oil developing countries widened; the global sum of deficits remained at $80 billion (Tables 14 and 15). At the same time, international financial intermediation by banks was adversely affected by the strains in the interbank market which developed in the aftermath of the 1974 bank failures. Non-U.S. dollar-based banks had trouble obtaining U.S. dollar funds in the interbank market as large U.S. banks reviewed their interbank lending and oil exporters became more selective in the banks they would do business with. As a result, many banks withdrew from international lending, and lending spreads rose abruptly. However, the sharp reduction in the external financing needs of the industrial countries and their ability to borrow through bond markets—international bond market activity picked up strongly in 1975, mainly in response to a substantial fall in short-term interest rates—enhanced the availability of bank finance to the non-oil developing countries. With a doubling of bond issues offsetting the decline in bank lending, net lending through private financial markets in 1975, both overall and to the non-oil developing countries, remained at about the same level as in 1974.

In the period 1976–78, the global sum of current account deficits remained about the same in nominal terms as in 1974–75, declining in real terms. The surpluses of oil exporting countries declined, and the normal pattern of industrial countries exporting capital to the non-oil developing countries was gradually reestablished. Associated with this development was a change in the role of the private international capital markets from the recycling of oil surpluses to the intermediation to developing countries of savings generated in the industrial countries. With confidence in the interbank market restored, the external payments position of most non-oil developing countries improving, and international bank lending profitable, banks rapidly expanded their international lending activity. By 1978, total lending by international banks and lending through bond markets had more than doubled from the level of 1974–75.

The oil price increases of 1979–80 affected external payments positions in much the same way as in 1974.62 The resulting increase in financing requirements appears to have been accommodated by the international capital markets more smoothly than in the earlier period. A major factor in the smoother adjustment was that, with the interventing growth in the markets, the increase in global current account deficits, from $87 billion in 1978 to $153 billion in 1980, was considerably smaller relative to the size of the markets.63 In the absence of disruptions in the interbank market, bank lending was able to expand at a steady pace, so that the weakness of the bond markets in the face of high and rising interest rates did not prove to be a problem. Total net international lending rose by more than $70 billion, all of which represented net bank lending as the volume of bond issues stagnated. Bank’s net external claims rose by about 25 per cent at an annual rate in 1979–80—a growth rate considerably smaller than in 1974 but much larger than in 1975. The total volume of bank finance in 1979–80 was three and one half times the volume in 1973–74 and was equivalent to about 120 per cent of the cumulative current account deficits, against less than 80 per cent in the earlier period.

Financing Through Private Markets of Current Account Deficits of the Principal Groups of Countries

The current account positions of the major groups of countries and their net borrowing from banks are set out in Table 15. While the strong upward trend in borrowing by the industrial countries reflects the growing integration of their capital markets more closely than their current account positions, the growth in borrowing has been strongest in periods of increasing net balance of payments deficits, particularly 1979–80. Borrowing from banks by other groups of countries has been more directly related to current account developments. This is not to say that current account deficits of these countries were always the cause and bank lending the consequence. In 1977–78, in particular, when the perceived risk of lending to developing countries and centrally planned economies was low, the ready availability of bank credit probably permitted these countries to run larger current account deficits than would have otherwise been possible, although much of the borrowing by non-oil developing countries in this period was for the purpose of building up reserves, which had declined relative to the value of imports after the oil price increase of 1973–74. This kind of precautionary borrowing was helped by the easing of terms on loans to non-oil developing countries, and it provided some countries with a cushion of reserves or undisbursed balances to help finance their growing current account deficits.

Table 15.Current Account Positions and Private Market Financing by Principal Groups of Countries, 1973–80(In billions of U.S. dollars)
19731974197519761977197819791980
All industrial countries
Current account position19-1217-2-630-11-44
Borrowing through private markets19272451595891121
Banking16221031394071100
Bonds35142020182021
Medium-term credit commitments12186913342234
Seven large industrial countries1,2
Current account position14-52277341-19
Borrowing in bond markets3481411101212
Medium-term credit commitments913257221219
Other industrial countries2
Current account position6-7-5-9-13-4-12—28
Borrowing in bond markets46669889
Medium-term credit commitments35446121015
Oil exporting developing countries
Current account position768354031368112
Borrowing through private markets33389111876
Medium-term credit commitments313361085
Non-oil developing countries
Current account position-12-37-47-33-29-38-58-82
Borrowing through private markets1116162317294454
Banking1015152114254152
Bonds11123432
Medium-term credit commitments5991313273528
Centrally planned economies4
Current account position-5-5-11-13-9-6-3-5
Borrowing through private markets334984782
Medium-term credit commitments11323342
Sources: BIS; World Bank; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States.

The data available do not permit a split in the volume of net bank lending between the seven large and the other industrial countries.

Almost all borrowing was from banks.

Excluding Fund member countries.

Sources: BIS; World Bank; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

France, the Federal Republic of Germany, Italy, Japan, the United Kingdom, and the United States.

The data available do not permit a split in the volume of net bank lending between the seven large and the other industrial countries.

Almost all borrowing was from banks.

Excluding Fund member countries.

Private market borrowing by non-oil developing countries rose substantially in 1979–80, when the oil price increases caused a sharp increase in external financing needs. The favorable response of the markets to the larger demands was facilitated by the fact that the increase in the current account deficit of non-oil developing countries between 1978 and 1980 was only about 50 per cent larger than the level of net borrowing through private markets in 1978, whereas the rise in the current account deficit between 1973 and 1975 was three times the amount of market borrowing in 1973 (Table 16). Borrowing net of repayment by non-oil developing countries from private markets in 1980—most of which was bank credit, as conditions in the bond markets were generally not very favorable—was equivalent to about two thirds of the aggregate current account deficit and total reserve accumulation in 1980 (Table 17). This ratio was somewhat higher than in 1978–79 and substantially higher than the previous ratios.

Table 16.Non-Oil Developing Countries: Current Account Positions and Private Market Financing, 1973–80(In billions of U.S. dollars)
19731974197519761977197819791980
All non-oil developing countries
Current account position-12-37-47-33-29-38-58-82
Borrowing through private markets1116162317294454
Banking1015152114254152
Bonds11123432
Medium-term credit commitments5991313273528
Major exporters of manufactures
Current account position-4-19-20-12-8-10-22-32
Borrowing through private markets127153025
Banking116131824
Bonds11111221
Medium-term credit commitments4365101413
Net oil exporters
Current account position-3-5-10-8-7-8-8-11
Borrowing through private markets7361114
Banking6251014
Bonds11111111
Medium-term credit commitments23349108
Low-income countries
Current account position-4-8-8-4-3-7-11-16
Borrowing through private markets211231
Medium-term credit commitments111114313
Other net oil importers
Current account position-1-5-9-9-11-13-17-24
Borrowing through private markets25661013
Medium-term credit commitments3344876
Memorandum items
Accumulation of reserves102-2131315122
Sources: BIS; World Bank; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

Less than $0.5 billion.

Almost all borrowing was from banks.

Mainly China.

Sources: BIS; World Bank; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

Less than $0.5 billion.

Almost all borrowing was from banks.

Mainly China.

Table 17.Non-Oil Developing Countries: Current Account Positions and Aspects of Their Financing, 1973–80(In billions of U.S. dollars)
19731974197519761977197819791980
Sum of current accounts deficits-16-38-48-38-36-42-61-83
Sum of current account surpluses41157531
Accumulation of reserves (—)-10-22-13-13-15-12-2
Total financing requirement-22-39-45-46-42-52-70-84
Nondebt-creating flows (net)1013121215152221
Long-term borrowing from official sources (net)610121113141521
Use of reserve-related facilities (net)224-1-13
Other borrowing (net)1614191915243339
Memorandum items
Borrowing in bond markets, net of repayment11123432
Borrowing from banks, net of repayment21015152114254152
Total net market borrowing in per cent of total financing requirement50.041.033.345.740.555.862.964.3
Sources: BIS; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

Includes errors and omissions.

BIS series, which includes all private and public borrowing from banks.

Sources: BIS; World Economic Outlook, IMF Occasional Paper No. 4 (June 1981); and Fund staff estimates.

Includes errors and omissions.

BIS series, which includes all private and public borrowing from banks.

Table 16 shows the relative importance of private market financing of current account deficits for major exporters of manufactures and net oil exporters among the non-oil developing countries. On the other hand, borrowing through private markets has been of little significance in the financing of the current account deficits of low-income countries.

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