Chapter

Appendix II: Developments in International Bond Markets

Author(s):
International Monetary Fund
Published Date:
August 1981
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Overview

In 1980, activity in the international bond markets was characterized by sharp swings, as strong fluctuations in short-term interest rates in the United States and other capital markets during the year frequently modified the propensity of investors to commit funds to longer-term financial instruments. As usual, long-term interest rates followed the direction of movements in short-term rates, but with more limited oscillations. The broad parallelism in interest rate fluctuations across capital markets to a large extent reflected the concern of national authorities that movements in short-term interest differentials should not impact unduly on the exchange markets. In the first quarter of 1980 short-term interest rates rose sharply, attracting funds toward shorter-term investments and, despite a gradual increase of long-term rates, markedly weakening demand for longer-term securities. As a result, bond issuing activity was reduced in most international capital markets in this period. This situation was reversed for a time after April 1980, with the decline in short-term rates (first in the dollar sectors and then in other markets), which led to expectations of a prospective decline in long-term rates also and renewed investor interest in longer-term financial instruments. Toward the end of the year, a rise in interest rates again adversely affected bond issuing activity in many capital markets. While these broad developments were representative of the main trends in the international capital markets, the issue volume in each market was also influenced by more specific factors, in particular by investors’ expectations regarding exchange rate developments.

The strength of the U.S. dollar in the exchange markets during the year and the high yield on dollar-denominated assets led to a sizable increase in nonresident demand for U.S. dollar-denominated bond issues in the Euromarket. However, in view of interest rate uncertainty, a sizable proportion took the form of floating rate notes,64 thus offering investors protection against subsequent increases in interest rates. The share of issues of dollar bonds and notes in the Euromarkets rose, while the share of deutsche mark-denominated bonds declined. Two sectors of the Eurobond market where issuing activity expanded considerably in 1980 were the pound sterling and French franc sectors, as investors were attracted by the exchange market strength of these currencies and high interest rates. Total new Eurobond issues amounted to $22.1 billion equivalent in 1980, a 25 per cent increase from the $17.8 billion recorded for 1979 (Table 18). Yields in all sectors of the market were on average higher in 1980 than in 1979; the increase in average yield was the highest in the U.S. dollar sector (250 basis points), while in the deutsche mark sector the increase was about 150 basis points.

Table 18.International Bond Issues and Placements, 1976–811(In millions of U.S. dollars)
19812
19761977197819791980Jan.-March
Foreign bonds
Industrial countries12,37910,15713,05712,3069,2782,338
Developing countries9671,6092,5841,6681,036189
Oil exporting3335711054696
Non-oil exporting9671,2762,0131,56399093
Centrally planned economies618
International organizations5,1934,7485,7065,8405,797606
Other4059019613351
Total foreign bonds18,93416,61021,54319,96516,1623,133
Eurobonds
Industrial countries10,99513,1679,83212,73017,4334,077
Developing countries1,1252,6173,1831,8651,425127
Oil exporting1774531,082309132127
Non-oil exporting9482,1642,1021,5561,293
Centrally planned economies72249303050
International organizations3,0632,4122,7192,8313,080363
Other1121,040176344144
Total Eurobonds15,36819,48415,93917,80022,1324,567
Total international bonds
Industrial countries23,37423,32422,88925,03626,7116,415
Developing countries2,0924,2255,7673,5332,461316
Oil exporting1777861,653414178223
Non-oil exporting1,9153,4394,1143,1192,28393
Centrally planned economies72256304850
International organizations8,2567,1608,4258,6718,877969
Other5171,130371477195
Total international bonds34,31136,09437,48237,76538,2947,700
Source: World Bank, Borrowing in International Capital Markets.

The country classifications are those used by the Fund.

Preliminary figures.

Source: World Bank, Borrowing in International Capital Markets.

The country classifications are those used by the Fund.

Preliminary figures.

The volume of foreign bond issues increased in the German capital market but declined in the other major markets (Switzerland, the United States, and Japan), as the pace of issuing activity in the first months of the year was slowed by the rise in short-term interest rates and, in the case of Japan, by balance of payments considerations as well. For the year as a whole, the total issues of foreign bonds were about $16 billion, well below the $20 billion recorded in 1979. The outcome of these contrasting developments in the various sectors was that total international bond issues and placements (Eurobonds and traditional foreign issues) in 1980 were at a level similar to that of 1979.

Issues and placements by developing countries on the Eurobond markets in 1980 were somewhat below the amount in 1979 and considerably lower than that in 1978 (Table 19). But developing country issues and placements of foreign bonds, which take place almost entirely on the Swiss, Japanese, and U.S. capital markets, declined much more sharply than their Eurobond issues. Total international issues and placements by developing countries amounted to only $2.5 billion in 1980, compared with $3.5 billion in 1979 and the peak level of $5.8 billion in 1978.

Table 19.Total International Bond Issues and Placements, 1965, 1970, and 1975–81(In billions of U.S. dollars and in per cent)
1965197019751976197719781979198011981
Jan.-March
Issues or placements of bonds in foreign markets
Of which:2.42.412.318.916.621.520.016.23.1
Developing countries20.10.61.01.62.61.71.00.2
As per cent of total4.24.95.39.612.18.36.46.0
Issues in the Eurobond market0.93.510.515.419.515.917.822.14.6
Of which:
Developing countries20.10.71.12.63.21.91.40.1
As per cent of total2.96.77.113.320.110.56.42.8
Total international bond issues33.36.022.834.336.137.437.838.37.7
Of which:
Developing countries20.10.21.32.14.25.83.52.40.3
As per cent of total3.03.35.76.111.615.59.46.34.1
Sources: Data for 1965 and 1970 are from OECD, Financial Statistics; data for later years are from the World Bank, Borrowing in International Capital Markets.

Preliminary figures.

The country classification is that used by the Fund.

Components may not add to totals due to rounding.

Sources: Data for 1965 and 1970 are from OECD, Financial Statistics; data for later years are from the World Bank, Borrowing in International Capital Markets.

Preliminary figures.

The country classification is that used by the Fund.

Components may not add to totals due to rounding.

The Record in 1980

The distinction between Eurobonds and foreign bonds denominated in the same currency has lost some of its sharpness in recent years. On the one hand, domestic investors in capital market countries have become more aware of investment opportunities in Euromarket issues denominated in their own currencies and, on the other hand, demand by nonresidents for foreign issues in the domestic market has become sizable. Interest rate developments for bonds in any particular currency in the two sectors tend to be parallel, with the difference in yields mainly reflecting perceived differences in the quality of borrowers that make use of the two sectors, different maturities, etc. Developments in new issue activity also tend to differ along currency lines rather than between Euromarkets, on the one side, and national markets for foreign bonds, on the other side,65 in the absence of general restrictions on access to the two sectors (such as issues in U.S. dollars and deutsche mark). Nevertheless, market imperfections were evident in 1980, as noted below.

The volume of issues in the U.S. dollar sector—foreign bonds in the United States and Eurobonds—rose in 1980 from the levels of 1978 and 1979. Issuing activity was concentrated in relatively short periods—between April and August, and again in October—when interest rates were declining. The yield on Eurodollar bonds, after having risen from an average of 11.5 per cent in September 1979 to 13.7 per cent in March 1980, declined to 11.3 per cent in June. They started rising again in the third quarter and, after a pause in October, resumed their rise in the last two months of 1980 (Chart 8). A small decline in the interest rate in January 1981 again fueled intense issuing activity, as borrowers waiting to tap the market rushed to take advantage of favorable investor sentiment.

Chart 8.International Bond Yields1

(In per cent)

1 Secondary market yields.

2 With remaining maturity of 7 to 15 years.

3 With remaining maturity of 3 years and over.

4 With remaining maturity of 3 to 7 years.

Within the U.S. dollar sector, the volume of Eurobond and foreign bond issues experienced divergent trends in 1980, as the former increased considerably in comparison with 1979, from $10.6 billion to $13.7 billion, while the latter declined from $4.6 billion in 1979 to $2.6 billion (Tables 20 and 21; also see Table 39). A number of factors contributed to this development. Traditional issuers of foreign bonds in the United States, such as the World Bank, and Canadian entities were largely absent in 1980. Yields were at times lower in the Eurodollar bond market because non-U.S. resident investors, attracted by the strength of the U.S. dollar, shifted their bond portfolios toward dollar-denominated instruments. The exchange rate outlook plays a lesser role in the U.S. domestic market, where U.S. investors, particularly institutional investors, are prevalent. Arbitrage between the two markets thus is less than perfect. Also, foreign issues in the United States are all traditional fixed-interest-rate instruments, whereas a significant share of the issues in the Eurodollar sector are floating rate notes. In periods of interest rate fluctuations and uncertainty these notes have been more attractive to investors than the fixed-rate bonds. While in the past floating rate notes have been issued mainly by banks, more recently also corporate and sovereign borrowers, including non-oil developing countries, have had recourse to this instrument, and the total volume of floating rate notes increased again in 1980 (see Table 40). Finally, convertible issues by corporate borrowers in the Eurodollar sector rose sharply, supported by favorable price developments in some stock markets, particularly Japan.

Table 20.Total Eurobond Issues and Placements by Currency of Denomination by All Countries, 1976–81(In millions of U.S. dollars and in per cent)
197619771978197919801Jan.-March 1981
Total AmountPer CentTotal AmountPer CentTotal AmountPer CentTotal AmountPer CentTotal AmountPer CentTotal AmountPer Cent
Deutsche mark2,82118.45,21526.86,53141.04,65526.24,25418.9
French franc620.41030.73342.11,0034.54189.2
Japanese yen1110.6790.51150.63011.4972.1
Netherlands guilder4673.03631.93842.43451.97443.32916.4
U.S. dollar9,99965.112,33663.37,69348.210,61459.713,66460.63,49476.5
Composite currency units1030.7340.22351.54122.3990.5681.5
European Currency Unit
European Unit of Account1030.7340.22031.33051.7800.4420.9
Special Drawing Right320.21070.6190.1260.6
Canadian dollar1,4509.46543.34682.62701.2
Kuwaiti dinar3042.01300.74813.03842.2260.170.1
Pound sterling2211.12871.82911.61,0894.91663.6
Saudi Arabian riyal1030.5950.6
Austrian schilling2351.0
Norwegian krone1010.5190.4
Other currencies1621.03171.6520.31410.83461.570.2
Total15,368100.019,484100.015,930100.017,799100.022,132100.04,567100.0
Issues and placements by developing countries21,1257.32,61713.413,18320.01,86510.51,4256.41272.8
Sources: World Bank, Borrowing in International Capital Markets; and Business International Corporation.

Preliminary figures.

The country classifications are those used by the Fund.

Sources: World Bank, Borrowing in International Capital Markets; and Business International Corporation.

Preliminary figures.

The country classifications are those used by the Fund.

Table 21.Foreign Bond Issues and Placements by Market Country, 1976–81(In millions of U.S. dollars)
Jan.-March
197619771978197919801981
Austria38299981
Belgium43148137
France76622317594
Germany, Fed. Rep. of1,3091,5111,6771,8343,496245
Public offerings5392986994171,900
Private placements7701,2139781,4171,596
Japan2871,3944,6873,0551,731399
Public offerings2191,1613,3781,6461,068
Private placements682331,3091,409663
Luxembourg378020620815947
Netherlands69218235216332586
Saudi Arabia2956452468621
United Kingdom56178146
Switzerland5,4444,9597,5539,5177,4412,060
Public offerings1,4951,6012,7793,3773,308
Private placements3,9493,3584,7746,1404,133
United States10,6327,6886,3594,6022,637150
Public offerings6,5275,5334,8264,1022,376150
Private placements4,1052,1551,533500261
Other countries13366189
Total18,94316,61021,54419,96516,1623,133
Source: World Bank.
Source: World Bank.

The volume of new issues of international bonds denominated in deutsche mark, combining Eurobond issues and foreign issues in the Federal Republic of Germany, increased to $7.7 billion in 1980, from $6.5 billion in 1979. The level of long-term interest rates in deutsche mark, which remained considerably below that in U.S. dollars (Table 22), proved attractive to borrowers in circumstances where 1980 exchange rate developments apparently dispelled the widely held expectations of previous years of the inevitable appreciation of that currency. In the first months of 1980 the rise of long-term rates in the deutsche mark sector was more moderate than in the U.S. dollar sector and issuing activity was relatively buoyant, while the fixed-rate dollar sector was very weak. Issuing activity intensified after April, as interest rates eased. In contrast with developments in the U.S. dollar sector, Euro-deutsche mark issues were somewhat smaller in 1980 than in 1979, whereas foreign issues rose significantly.66

Table 22.Secondary Market Yields on Eurobonds, 1979–81(In per cent per annum; at end of period)
197919801981
DecemberMarchJuneSeptemberDecemberMarch
Eurodollar bonds
With remaining maturity of 3–7 years111.914.510.812.314.014.3
With remaining maturity of 7–15 years211.513.711.312.513.313.7
Deutsche mark-denominated bonds
With remaining maturity of 3–7 years27.810.18.38.69.710.53
With remaining maturity of 7–15 years27.810.18.28.69.410.03
Source: OECD, Financial Statistics.

Rates for bonds of private corporations.

Unweighted average of rates for bonds of international organizations, public sector entities, and private corporations.

February 1981.

Source: OECD, Financial Statistics.

Rates for bonds of private corporations.

Unweighted average of rates for bonds of international organizations, public sector entities, and private corporations.

February 1981.

Apparently, nonresident interest in Euro-deutsche mark issues declined sharply in comparison with previous years, as a result of changed expectations regarding the exchange rate in light of market developments and Germany’s balance of payments prospects. Evidence suggests that nonresidents also liquidated part of their existing holdings of deutsche mark bonds, which were taken up by residents. The large capital outflow through the capital markets added to pressure on the exchange rate and led to restrictions on such outflows. The Capital Market Subcommittee, an unofficial group of major issuing banks, in which the central bank participates as observer, decided in early December 1980 to halt deutsche mark bond issues and private placements by nonresidents temporarily, both on the domestic market and on the Euromarket. The measure was in effect through the end of March 1981. Issues and placements of international organizations were exempt.

The volume of foreign bond issues in Switzerland declined in the first four months of 1980, as rising interest rates and exchange market developments were limiting investors’ demand, a sizable proportion of which traditionally is from nonresidents. The coupon rate rose in that period by 50 basis points to 6 per cent. In these circumstances, the major Swiss issuing banks agreed among themselves in March 1980 to slow the pace of new foreign issues markedly and to limit the maximum amount of each issue to Sw F 80 million rather than the customary Sw F 100 million. The volume of foreign issues recovered after April, spurred by stable interest rates, and remained relatively high for the rest of the year. For the year as a whole the volume of foreign issues and placements totaled $7.4 billion equivalent, well below the $9.5 billion in 1979. Nevertheless, foreign bonds represented almost 60 per cent of total bond issues and placements in the Swiss market in 1980, a proportion similar to that of previous years. In early 1981 some floating rate notes were issued for the first time, but the authorities have viewed this development with reluctance.

Two markets that became increasingly active in 1980 were those for French franc-denominated and sterling-denominated international bonds. Almost all issues of international bonds denominated in French francs are launched in the Euromarket, in part because of the existence of a withholding tax on interest payments, which applies on bonds issued in the domestic market. Only a few European international organizations have made recurrent access to the domestic market.67 Euro-French franc issues during 1980 have been met with favor by foreign investors because of the strength of the exchange rate, the high level of interest (between 13 and 14.5 per cent), and the relative stability of interest rates. The 1980 issue volume rose to $1,003 million, the highest volume ever recorded on that market, compared with about $100 million in 1978 and $330 million in 1979. Subscribers seem to have been broadly diversified by origin, but with a strong participation by Middle Eastern investors.

In the sterling sector, the abolition of exchange controls in 1979 made it possible for foreign borrowers to enter the domestic market as well as the sterling Euromarket. There was only one issue in the domestic market in 1980 ($178 million equivalent) because potential borrowers were waiting for a decline in interest rates, which did not materialize. The volume of sterling Eurobond issues, sustained by strong nonresident demand for sterling assets, in light of the favorable outlook for the exchange rate and high interest rates, rose sharply to $1,089 million equivalent, over three times the amount issued in each of the two preceding years. Maturities in the sterling Eurosector are in general much shorter than in the domestic sector, where issues are taken up by traditional institutional investors who have a demand for long-dated paper with maturities up to the 20-year to 30-year range. However, given the high level and structure of interest rates, borrowers were much more willing to tap the sterling Euromarket for shorter maturities than to enter the domestic market to issue high-yield obligations of long maturity.

In the Japanese foreign bond market, issuing activity was very limited in the first four months of 1980, as sharply rising interest rates deterred investors’ demand and the weakness of the exchange rate arising from an unfavorable balance position tended to discourage nonresident investors. When interest rates declined after April68 and the exchange rate strengthened, investors’ sentiment became more favorable and issuing activity picked up noticeably. Difficulty in absorption by the market emerged again in the fourth quarter, and the leading issuing houses decided at the end of November to halt new issues temporarily, an action that was reversed in January 1981. Total foreign bond issues and placements in 1980 amounted to $1.7 billion, considerably below the level of the two preceding years ($4.7 billion in 1978 and $3.1 billion in 1979) as a result both of the limited amount of public issues in the first part of the year and the fact that foreign private placements69de facto were not permitted between late 1979 and early 1981.70

Euro-yen bond issues, which have been officially permitted only since 1977 and which remained very limited in volume through 1979 (about $100 million equivalent a year), rose close to $300 million in 1980, reflecting in part a more relaxed attitude of the authorities in light of balance of payments developments and a growing international interest in the currency. In 1980 six Euro-yen issues were brought to the market (against two in 1979 and one in 1978). For the first time, sovereign borrowers were allowed to issue Euro-yen bonds, and two such issues took place.

Foreign issues in the Netherlands were greater in 1980 than in 1979 ($325 million versus $163 million), although less than in 1978. Borrowers were mainly international organizations and governments of a few developed countries. The large domestic borrowing requirement of the Government has continued to exert pressure on the capital market, contributing to the maintenance of relatively high long-term interest rates. Guilder-denominated instruments continued to be attractive to foreign investors, so that a sizable number of foreign bond issues in the domestic market in 1980 were taken up by foreigners. The Euroguilder note market, where medium-term paper is issued, is used both by foreign and by Netherlands borrowers, especially financial institutions, which are attracted by the less regulated and cheaper issuing procedures. The volume of new issues, which is controlled by the Netherlands Bank, more than doubled in 1980 to about $750 million.

The volume of foreign issues in the small Luxembourg capital market was $150 million in 1980, somewhat below the 1979 volume. Borrowers are traditionally international institutions and private sector companies. No foreign issues took place in 1980 in Belgium, compared with about $150 million in 1978 and 1979.

A sector of the Euromarket that opened in 1980 was the Norwegian krone sector, in which four issues were floated in 1980, for $100 million equivalent. These instruments have appealed in particular to certain Middle Eastern investors. One international organization brought to the Euromarket for the first time an Austrian schilling-denominated bond. After a relatively large number of issues in Kuwaiti dinars were floated in 1978 and 1979, only one issue was arranged in 1980, partly because of high domestic interest rates and shortcomings in the functioning of the secondary market. New issues denominated in Canadian dollars remained limited in number.

Institutional and Policy Factors

Balance of payments and exchange rate developments, as well as capital market conditions, were major factors behind informal measures by the authorities of a few capital market countries in 1980 that have led to changes in the degree of openness of these markets to foreign issues. Concern for the maintenance of orderly market conditions in the face of rapidly rising interest rates led, in the case of Switzerland, to an agreement among the major Swiss security houses early in 1980 for a temporary slowdown of new issues that was in effect, however, only for a short period of time. Technical aspects of the regulatory framework also may have an effect on the attractiveness of a capital market to foreign borrowers. In the case of the United States, a more flexible procedure for registration of new issues by sovereign borrowers introduced at the end of 1980, as discussed below, may encourage access to this capital market by such borrowers.

In the Federal Republic of Germany, as mentioned above, concern about the balance of payments impact of capital outflows through nonresident issues in deutsche mark led to an informal agreement between the Deutsche Bundesbank and the Capital Market Subcommittee to halt international deutsche mark issues of foreign bonds and Euro-deutsche mark bonds temporarily, with the exception of issues by international organizations; this measure lapsed at the end of March 1981. To promote capital imports, the existing restrictions on purchases by nonresidents of domestic money market paper and fixed-interest securities of domestic issuers with maturities up to four years were gradually eased in 1980 by allowing subscriptions with increasingly shorter maturities, and such restrictions were eliminated altogether in February 1981. This liberalization probably had a limited effect on capital imports in any case, given the relatively unfavorable attitude of foreign investors toward deutsche mark instruments in 1980 because of both relatively low yields and exchange rate developments. The liberalization measures may, however, lead to a further internationalization of the German capital market over time.

During 1980 the authorities of Switzerland lifted the existing restrictions on capital imports, in light of the exchange market developments for the Swiss franc. Together with the elimination of the prohibition of interest payments on deposits held by nonresidents, the authorities authorized nonresidents to subscribe to short-term paper and permitted central banks and foreign monetary authorities to acquire private placements and note participations in credits denominated in Swiss francs, provided they undertook to hold them until maturity. This measure, which eliminated the remaining restriction on the acquisition of foreign public issues and private placements by nonresidents, may have the effect of enlarging the market for foreign private placements and credits denominated in Swiss francs. Also, more flexibility was given to the market for private placements, by allowing all domestic domiciled banks, including subsidiaries of foreign banks, to take part in the placement of private notes—a function previously restricted to the issuing banks. The authorities are very keen to prevent the formation of a market for Swiss franc-denominated bonds outside Switzerland, and in this context have firmly and successfully opposed legislative proposals to introduce a withholding tax on the interest on foreign bonds issued in Switzerland, which would have created a strong incentive for the formation of a Euro-Swiss franc bond market.

In Japan, in the face of a large current account deficit and some weakness of the yen toward the end of 1979, security dealers limited the volume of new public issues in the first quarter of 1980. Private placements by foreign borrowers were suspended from the end of 1979. Private placements are the channel for recourse to the capital market, which is used in particular by developing country borrowers which are not sufficiently well established to be allowed to make a public offering of bonds. The suspension of private placements by nonresidents was lifted in January 1981, after the market situation had recovered and the exchange rate had strengthened.

In the United States, the Securities and Exchange Commission in 1980 adopted a simplified procedure for registration of multiple issues by the same borrower. Under this procedure a prospective borrower can periodically file a prospectus with the Commission, indicating the global amount he intends to raise, so that only updated information needs to be provided before an issue is actually launched.

International French franc issues take place almost entirely in the Euro-French franc bond market, with only a few foreign issues of international organizations being absorbed in the domestic capital market. The French authorities exercise control over the issue calendar for Euro-French franc issues through the intermediation of the French banks, which participate as lead managers in every issue. The calendar is aimed at maintaining a balanced composition of issuers between French and foreign names, and between private and public sector institutions, and at permitting the market to expand over time. The relatively sharp expansion in the number of issues and in volume in 1980 reflected the strong demand by nonresidents for French franc-denominated issues and official management of the issue calendar, against the background of the relatively strong external position of France and the level and structure of interest rates. Interest rate policy was directed toward establishing a positive differential between long-term and short-term rates and to maintaining at the same time reasonable stability in the long-term rate—two factors that were favorable to aggregate bond subscriptions in the French market.71 The French sector was one of the very few markets in which a normal yield curve (upward sloping, as a function of term to maturity) prevailed during 1980. In the domestic bond market a queue system is organized by the French Treasury and the main banks, with the banks responsible for issues by private business corporations and financial institutions, while the Treasury is in charge of issues of the Government, public agencies, international organizations, and possibly foreign borrowers. In the past, foreign borrowers on the domestic market have been mainly international organizations. The authorities in principle grant access to the calendar for any foreign borrower of a quality that would ensure adequate receptivity by investors without any specific official intervention. The withholding tax on interest payments to both resident and nonresident investors72 implies that the yield on issues on the domestic market generally would exceed those on similar issues on the Euro-French franc market. Because of this, and the greater flexibility of issues in the Euro-French franc market, it is not expected that many foreign borrowers would be greatly attracted to the French domestic capital market.

After the abolition of exchange control in the United Kingdom, international issues denominated in sterling could be launched either in the U.K. domestic market or in the sterling Euromarket. The policy of the Bank of England is to act to help ensure that the market for external issues (both Eurobonds and domestic issues) expands in an orderly way; and to this end, with the cooperation of foreign authorities as necessary, it requires that sterling issues be made only in the United Kingdom. All sterling issues must be led by a U.K. issuing house, but foreign-owned institutions will be eligible to act as co-leader if there are reciprocal arrangements in their domestic capital markets for U.K. institutions. There is at present no queuing system for sterling Eurobond issues, as their impact on the domestic capital market is limited. Issue managers must, however, notify the Bank of England in advance and receive a timing consent. If another issue has been scheduled for the same day, the Bank of England will put the two underwriters in contact. There is a queuing system for foreign issues on the domestic market, with each borrower receiving a date in the queue.73 The queue is administered by the Bank of England on a first-come-first-served basis, without giving priority to any type of borrower. The purpose of the queue is to avoid periods of market congestion such as have happened in the Eurodollar bond market, for example.

Sterling Eurobonds and domestic bonds differ in technical characteristics, such as the fact that the former are bearer bonds on which interest rates to nonresidents are paid gross of any income tax, while traditional bonds are registered and the paying agent or registrar deducts income tax at the standard rate on any interest payments.74 The maturity for a Eurobond is generally much shorter than for a bond issued on the domestic market, where maturities can extend up to 30 years, given the participation of institutional investors, such as life insurance companies. The size of a Eurobond issue (generally about £20 million) is considerably smaller than for an issue on the domestic market, where the amount may reach £ 100 million.75

In the domestic markets, foreign issues by offer of sale to the public can qualify for trading in the gilt-edged sector, where they benefit from much lower commissions and greater marketability. Traditionally, access to the gilt-edged sector has been reserved for the U.K. Government and government-guaranteed securities and for Commonwealth Government securities, but in 1980 the authorities announced that they would stand ready to grant admission to the gilt-edged market to issues of foreign central governments and international organizations. The first foreign issue admitted to the gilt-edged market was one of Sweden in April 1981.

The authorities believe that the prospects for an expansion in sterling-denominated issues by foreigners is more favorable in the domestic bond market rather than in the sterling Euromarket, because of its much wider dimension, the large secondary market, and the possibility of longer maturities and larger amounts.76

Market Developments in the First Quarter of 1981

In the first quarter of 1981 issuing activity was relatively strong in some currency sectors of the Eurobond market, such as the U.S. dollar, French franc, and sterling sectors, and for foreign issues in the Swiss, Japanese, and U.K. markets. The total amount of foreign and Eurobond issues, at $7.7 million, was, however, somewhat lower than a year before.

In the U.S. dollar sector of the Eurobond market, issuing activity accelerated during short periods when demand was fueled by expectations of a decline in interest rates; the strength of the dollar in the foreign exchange market contributed to sustaining the interest of international investors in dollar-denominated issues, in particular those on a floating-rate basis. Only one foreign issue took place in the U.S. domestic capital market.

Issue activity intensified in the Euro-French franc sector, as in the face of favorable demand conditions, the authorities allowed the frequency of issues to increase to one every two weeks from one every three weeks in 1980. The volume of new issues, at $418 million, was approximately half the amount recorded in the entire year 1980. In the sterling sector, the volume of sterling-denominated issues in the Euromarket at an annual rate was somewhat lower than that recorded in 1980. There was a pickup in activity in the domestic U.K. market, with two foreign issues launched in the first quarter of 1981, for an amount of $166 million, against one in 1980; in April these were followed by the first issue of a developing country since the reopening of the market to foreign borrowers.

The deutsche mark sector of the international bond market remained de facto closed up to the end of March, with issues of international organizations the exception. Four such issues, for a total amount of $245 million equivalent, were made in February and March.77 After the lapse of the gentlemen’s agreement with the Deutsche Bundesbank, the Capital Market Subcommittee at its end-March meeting decided to reopen the market, and new issues for DM 350 million ($170 million) were brought to the market in April; that amount was much lower than the monthly average in 1980. In view of the German balance of payments situation, it is likely that the issue calendar will continue to be managed with an attitude of caution during the rest of 1981—and taking into account nonresidents’ demand for deutsche mark instruments, to avoid excessive net capital outflows. Many observers foresee a volume of nonresident issues in deutsche mark in 1981 below that of 1980.

In the Swiss capital market, issuing activity in the first quarter of 1981 expanded at a faster annual rate than during 1980. Borrowers were attracted by interest rates lower than those in the other markets, but investors’ resistance led during the quarter to a rise in interest rates from 5.5 per cent in January to the 6.5–7.0 per cent range in April. It is expected that during the rest of the year the issuing activity will remain at a sustained level, in light of the attractive conditions for borrowers, although the issue terms may harden further.

In Japan, the volume of foreign bond issues accelerated in February and March. In March the underwriting houses agreed on a calendar of two public bond offerings per month, for a total monthly amount of ¥ 40–50 billion ($180–230 million), which represents a significant acceleration from the pace of new issues in the second half of 1980. With regard to private placements, at the beginning of the year a calendar of one issue per month in an amount of ¥ 10 billion was decided. On this basis, in the year as a whole the total volume of foreign public issues would exceed the ¥ 400 billion reached in 1979 ($1.6 billion). As long-term interest rates in Japan in the first quarter of 1981 remained below the 9 per cent level, borrowers’ interest in the market has been strong and is expected to continue during the year. Reportedly, there are several developing country borrowers, which traditionally have made large recourse to the Japanese market, already in the informal queue.

The volume of foreign issues in the Netherlands and Luxembourg in 1981 is not expected to differ substantially from that of 1980, while in Belgium the weak external situation and very large government financial requirement will continue to keep the market effectively closed to foreign borrowers, other than perhaps some international organizations.

The first months of 1981 have recorded a pickup in issues denominated in SDRs. One issue came to the market in January and two in April for a total amount of SDR 170 million, and one of these issues was, for the first time, on a floating-rate basis.

Developing Country Borrowing in International Bond Markets

Activity in 1980 and Early 1981

Developing country borrowing in the international bond markets—Euromarkets and domestic capital markets open to foreign borrowers—amounted to $2.5 billion in 1980, considerably below the $3.5 billion of 1979 and the $5.8 billion peak of 1978. While borrowing on the Eurobond market was maintained at a level close to that of 1979, there was a sharp decline in developing country borrowing in the foreign bond markets. In the past this has been concentrated in the Japanese, Swiss, U.S., and German capital markets (Table 23). From 1975 to 1979 a major trend in the foreign bond market had been a sharp decline in the share of developing country bond issues taking place in the United States and an increase in the share of the issues launched on the Swiss and Japanese markets. Issues on the U.S. market in 1975 accounted for 90 per cent of all foreign bond issues and placements by developing countries, while in 1979 the share of the U.S. market was down to 22 per cent versus 44 per cent for the Japanese market and 26 per cent for the Swiss market. In 1980 the share of the U.S. market again rose, to 37 per cent, as a result of a small increase of issue volume in the United States, but more importantly because issue volume fell sharply in Japan (from $733 million in 1979 to $341 million in 1980) and to a lesser extent in Switzerland (from $427 million in 1979 to $313 million in 1980). A listing of issues by borrowers and markets in 1980 is given in Table 41.

Table 23.Developing Countries: Issues of Foreign Bonds by Markets, 1977–80(In millions of U.S. dollars)
19771978197919801
AmountPercentage ShareAmountPercentage ShareAmountPercentage ShareAmountPercentage Share
Capital markets
United States81750.843616.837522.538236.9
Switzerland40425.168926.742725.631330.2
Japan37923.61,25648.673344.034132.9
Germany, Fed. Rep. of80.51897.3653.9
Netherlands372.2
Others150.6301.8
Total1,608100.02,584100.01,668100.01,036100.0
Source: World Bank, Borrowing in International Capital Markets.

Provisional figures.

Source: World Bank, Borrowing in International Capital Markets.

Provisional figures.

The Japanese market had become an important bond market for developing country borrowing after 1976, with issues and placements by the developing countries accounting for about one fourth of total foreign issues in that market during 1977–79, a share substantially larger than that in other capital markets.78 This reflects the relatively high receptivity of Japanese investors for issues by developing countries and also the fact that developing countries have extensively used the vehicle of private placements, for which the procedures are simple and which are not subject to the screening criteria adopted for public issues, according to which the borrower must have launched other issues previously.79 In 1978 and 1979 private placements accounted for about 30 per cent of the total borrowing of developing countries in the Japanese market, but, as mentioned above, private placements were not allowed in 1980.

The closure of the private placement market for foreign borrowers from the fall of 1979 to early 1981 undoubtedly impacted disproportionately on the amounts borrowed by developing countries during 1980; their share of total foreign bond issues declined to 14 per cent. That measure was taken because of concern for the weakening of the balance of payments and of the exchange rate. The volume of public issues by developing countries in Tokyo in 1980 was moderately lower than in 1979. The private placement market was reopened in January 1981 after the yen exchange rate had strengthened considerably as a result of large capital inflow. This development, together with the announcement in March 1981 of an acceleration in the pace of new public offerings and the attractive interest rates for borrowers, is likely to lead to an increased volume of developing countries’ aggregate issues and placements in 1981. One public bond issue by a developing country was launched in March 1981.

In Switzerland the decline in developing country bond issues and placements in 1980, in comparison with 1979, was more or less in line with the general reduction of foreign issues and placements. Entry into the capital market is not subject to legal restrictions, and no official preference is accorded to developing country issues; the authorities leave decisions on the size, terms, and timing of any issue to the markets. In time of market weakness, underwriting banks tend to bring the most established names to the head of the queue, with the effect of slowing the flow of issues of developing countries. On the other hand, international development finance institutions generally have received a favorable place in the queue.

In the German domestic capital market no developing country issues were launched in 1980, but that is not surprising; underwriters generally take developing country issues to the Euro-deutsche mark sector, where wider geographical participation of investors gives better assurance of successful flotation. Issues of developing countries in the Euro-deutsche mark sector rose in 1980 to $555 million equivalent ($421 million in 1979), accounting for 13 per cent of all Euro-deutsche mark issues, compared with 9 per cent in 1979 (see Table 42). Priority in the calendar is given to issues of development finance institutions, as confirmed by the exemption of their issues from the ban on foreign bond issues which was in effect between December 1980 and March 1981. When the market for nonresident deutsche mark issues was reopened at the end of March 1981, no developing country issue was placed in the calendar for the first month by the Capital Market Subcommittee because of the desire to test the market, perceived as weak, only with the most established names.

Issues by developing countries in the U.S. market have in recent years been limited to a very few selected names. It has been said that the registration and documentation requirements of the U.S. authorities for public issues, together with the possibilities offered by other capital markets and in particular the Eurodollar bond market, have gradually reduced the interest of some developing countries in approaching the U.S. market. In 1980 developing country issues amounted to $382 million, corresponding to 15 per cent of total foreign issues. Developing country issues in the Eurodollar market declined between 1979 and 1980, from $1.3 billion to $0.8 billion, in contrast with the increase in total new issue volume.80 In the first quarter of 1981 no developing country issue was launched in the U.S. domestic market, while issues in the Eurodollar market amounted to $127 million (see Table 41).

In the French franc sector, the sharp expansion of the Euro-French franc market provided new opportunities for developing country issues. In practice, almost all foreign issues denominated in French francs have been launched on the Euro-French franc market for the reasons previously mentioned. The authorities are ready to give a place in the calendar to developing countries; in 1980 one out of the eight foreign issues on the market was from a developing country borrower.

Despite the strong expansion of the Eurosterling sector and the opening in 1979 of the U.K. capital market to foreign issues, no sterling-denominated issues by developing countries were made in 1980. In April 1981 a developing country tapped the domestic capital market for the first time since its reopening. In the Euro-sterling sector, no centrally organized issue calendar exists, and the responsibility for the date on which to take issues to the market rests with the issuing banks. The authorities view the decision reached in 1980 to open the access to the gilt-edged sector of the market to all sovereign borrowers as an important aspect of nondiscriminatory treatment among all potential borrowing countries.

Issues of developing countries on the Netherlands capital market and the Euroguilder market have traditionally been quite limited. After one issue in 1979, there were none in 1980; but there have been a number of issues by international development institutions. The Netherlands Bank operates a queue for public bond issues, based on the first-come-first-served principle and subject to the financing needs of the Government, which are accommodated with priority. There were no developing country borrowers in the queue through March 1981. The high level of interest rates in the Netherlands in comparison with the Federal Republic of Germany, Switzerland, and Japan is considered to be one factor that has discouraged borrowing by developing countries in the Netherlands. The market for Euro-guilder notes has been traditionally tapped by Netherlands industrial corporations and financial institutions and by foreign corporations; this market offers more flexibility than the domestic market in terms of timing of issues, less regulation, and lower issuing costs. For these reasons the authorities feel that this market over time could prove attractive to developing countries.

Borrowing by Individual Countries

As in previous years, borrowing in the international bond markets by developing countries in 1980 was concentrated among a limited number of experienced borrowers. Nine countries accounted for 80 per cent of the total volume of developing country bond issues, and the five largest borrowers (Argentina, Brazil, Israel, Mexico, and South Africa) accounted for over two thirds of the total. Despite the preponderance of a few countries in the volume of issues, the number of developing countries that have made recourse in recent years to bond issues in international markets has been relatively large; in each year since 1977, 20 or more different countries have tapped the bond markets (20 in 1980; Table 24). In 1980 the issue volume by some of the main developing countries’ borrowers in the international bond markets, such as Argentina and Brazil, declined considerably, but at the same time other countries, such as Costa Rica, Ivory Coast, Korea, and Egypt, increased their recourse to the market or, as in the case of Colombia and India, approached the market for the first time in recent years.

Table 24.Developing Country Issues and Placements in the International Markets, 1975–801(In millions of U.S. dollars or equivalent)
1975197619771978197919802
Total developing country international bonds31,2622,0924,2255,7573,5332,461
Algeria35147215720183
Argentina1643266416164
Bolivia15
Brazil35193856936736316
Chile53508482
Colombia55
Costa Rica20109
Ecuador862
Egypt2530
El Salvador25
Gabon15
Haiti8
Hong Kong25128
India30
Indonesia171046346
Iran308169
Israel245351340426437456
Ivory Coast1014
Korea7472564448
Kuwait62
Lebanon5
Malaysia1043139152
Mexico2704281,348687363356
Morocco284528912223
Panama142721511125
Papua New Guinea2525
Philippines36713021617667
Portugal5030
Romania100
Saudi Arabia1014
Singapore121751552525
South Africa3728533482244371
Sudan9
Thailand6917646
Trinidad and Tobago150
Tunisia491026
Turkey24
United Arab Emirates42
Venezuela438690154131
Yugoslavia901291279637
Source: World Bank, Borrowing in International Capital Markets.

The country classification is that used by the Fund.

Preliminary figures.

Foreign bonds and Eurobonds.

Source: World Bank, Borrowing in International Capital Markets.

The country classification is that used by the Fund.

Preliminary figures.

Foreign bonds and Eurobonds.

As in previous years, the total gross amount of funds raised by developing countries in the bond market appears very limited when compared with the volume of their syndicated international banking credit commitments, which amounted in 1980 to $33.3 billion. However, net financing through bond issues is not an insignificant net source of funds for a few developing countries, in particular for those which are the most frequent issuers in the markets.

Borrowing Terms

As in previous years, average maturities for developing country issues in 1980 were somewhat longer in the traditional foreign bond markets than in the Eurobond markets (see Table 43). The comparison is, however, less clear than in the past because there are a large number of issues for which the maturity is unknown. In comparison with previous years, there was a sharp drop of issues in foreign bond markets with maturities of over ten years; this long-term category had accounted for 22 per cent of total issues in foreign bond markets in 1978 but declined to only 2 per cent in 1980.81 A comparison of the maturity distribution of international bond issues by developing countries in recent years with maturities of syndicated international bank credits is given in Table 44. In 1978 and 1979 bank credit maturities increased substantially, with bank credits with maturities in excess of seven years comprising, respectively, 62 per cent and 77 per cent of the total. While the proportion of bank credits in this maturity range declined to 68 per cent in 1980, it still was larger than that for foreign bonds (52 per cent) or Eurobonds (45 per cent). In assessing these comparisons, it should be taken into account that the average maturity of a bond generally is longer than that for a bank credit of equal final maturity, since the former is usually retired at the end of the period rather than through periodic repayment of principal.

A comparison of the yields on newly issued foreign bonds and Eurobonds by developing countries with those of other borrowers in recent years (see Table 45) shows that offering yields on developing country issues are somewhat higher than those of industrial countries and international organizations. The size of the differential varies over time and across markets; it traditionally tends to be quite small in the Japanese foreign bond market and in the U.S. dollar Eurobond market, where average spreads in relation to industrial country issues in 1980 were, respectively, 19 and 12 basis points. This differential is somewhat larger in the German and Swiss foreign bond markets and in the Euro-deutsche mark bond market, where average spreads between developing and industrial country issues in 1980 were between 50 and 100 basis points, a range similar to that recorded in 1979 and smaller than that in 1978.

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