Chapter

I Approach to Resolving Debt-Servicing Difficulties

Author(s):
G. Kincaid, K. Dillon, Maxwell Watson, and Chanpen Puckahtikom
Published Date:
October 1985
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The number of debt restructurings has increased sharply since the emergence of widespread payments difficulties in 1982. In that year, only 7 bank and 6 official restructuring agreements or temporary deferments were negotiated; in 1984, there were 21 and 13 respectively. Moreover, a substantial portion of the recent new private lending being made to developing countries has been coordinated under restructuring arrangements.

This paper, following two earlier studies, reviews the arrangements for restructuring commercial bank and official debt up to early 1985.1 This review does not deal in detail with the conditions in the world economy that are essential if debtor countries are to be successful in their adjustment efforts over the medium term. These conditions are analyzed in the most recent World Economic Outlook of the International Monetary Fund and include, inter alia, adequate flows of official and private capital on reasonable terms, economic policies in the industrial countries that will promote a noninflationary recovery and a resurgence of world trade, and greater access to markets in industrial countries for exports from developing countries.2

The first section of the present study identifies trends in the growth of developing countries’ debt and debt service, reviews the major sources of recent debt-servicing difficulties, and discusses approaches to resolving these problems that have been taken by debtor nations and by their creditors. The next two sections provide more detailed information on the recent experience with multilateral debt restructurings by banks and by official creditors, and the final section investigates certain questions concerning the comparability of treatment between various groups of creditors and different types of debt. The term restructuring is used in this paper to cover rescheduling, and also refinancing, undertaken to ease countries’ external payments difficulties. Rescheduling formally changes existing contracts to extend the maturity of payments due to lenders, while under refinancing new loans are arranged to cover the timely payment of the original debts. A glossary of terms used in bank and official debt restructurings is provided in Appendix II.

Although some aspects of restructuring have evolved over the past two years, the basic approach has remained the same: each restructuring is addressed case by case, and almost all have close links with the implementation of an adjustment program by the debtor country. These two essential elements arise out of the nature of the problem. Analysis of the sources of debt difficulties shows that a primary cause in most countries has been inappropriate domestic policies (particularly excessive fiscal deficits) and inadequate debt management, which left countries seriously vulnerable to the deterioration in world economic conditions that occurred from 1979. Restructuring exercises link financial support by creditors to the implementation by the debtor of domestic policies that can provide the basis for a return to a sustainable payments position and more normal debtor-creditor relations in the medium term. By coordinating support among large and diverse groups of creditors in the context of a broad-based discussion of each case, such exercises have provided debtors with resources necessary to smooth the adjustment path and have facilitated the maintenance of an orderly international financial system.

As a reflection of the progress made through this approach, many countries that have experienced payments difficulties since 1982 have now laid the foundations for medium-term adjustment. In particular, countries such as Mexico, Venezuela, and Ecuador that have made substantial progress in adjustment have entered into longer-term arrangements with their creditors on more favorable terms—a signal that the prerequisites for more normal market relations are being established.

The data on developing countries’ debt to commercial banks that are used in this paper are drawn from various sources. Information on bank lending since 1982 is derived primarily from the Fund’s International Banking Statistics (IBS), corrected for the effect of exchange rate changes.3 Sources other than the IBS are used principally to provide information on longer-term trends and on terms and conditions of lending: for developments and trends before 1982, data provided by the Bank for International Settlements (BIS) in International Banking Developments are used; information on the maturity distribution of banks’ external assets and on banks’ undisbursed credit commitments is derived from the Maturity Distribution of International Bank Lending of the BIS; data on banks’ long-term credit commitments and on bond placements and issues come mainly from Financial Statistics Monthly of the Organization for Economic Cooperation and Development (OECD); and information on the terms and conditions of long-term lending commitments is derived principally from the OECD’s Financial Market Trends. Direct comparisons among different series of data on stocks of debt or lending flows should be made cautiously, however, in view of the different definitions and coverages that apply. It should also be noted that data on increases in bank exposure to developing countries are generally not adjusted for guarantees or other risk transfers, or write-offs of existing loans by banks.

Developments in External Debt

The external debt of non-oil developing countries increased more than fourfold between 1973 and 1981—the years prior to the emergence of widespread debt-servicing difficulties (Table 1). Over the same period the ratio of these countries’ external debt to their gross domestic product (GDP) rose from 22 percent to 29 percent. The external debt of these countries also increased relative to exports of goods and services; this ratio rose from 115 percent in 1973 to 128 percent in 1981. Developments varied widely among countries; for example, the major borrowers—Argentina, Brazil, Indonesia, Korea, Mexico, the Philippines, and Venezuela—experienced an increase in their debt-export ratio from 160 percent to 187 percent during these years. The external debt of oil exporting countries grew at roughly the same pace as that recorded by other developing countries, but the faster increase in exports of oil exporting countries resulted in a lower ratio of external debt to exports of goods and services at the end of 1981.

Table 1.Non-Oil Developing Countries: External Debt, 1973–19841
197319741975197619771978197919801981198219831984
(In billions of U.S. dollars)
Total external debt130161191228291343406490578655694731
By maturity Short-term21823273353606693114132113104
Long-term112138164195238283340396464523580627
To official creditors51607082100119136158177198221241
To private creditors617895115138164204239287325359385
By region
Africa151923285055637078899195
Asia34394553687794116135154167179
Europe212529343847556772737579
Middle East101114182631364247525660
Western Hemisphere51678095109132158194247288304318
(In percent)
Ratios
Debt to exports of goods and services115105122126132132121115128151158152
Debt-service payments to exports of goods and services3161416151619201822252222
International reserves to debt322721232325232017141516
International reserves to short-term debt224189148159128142143103857089110
Net private financing to net financing requirement4404648454753565863442722
Source: International Monetary Fund.

Total debt in this table covers public and publicly guaranteed debt and, where available, private nonguaranteed debt. Details may not add to totals, owing to rounding.

Debt with an original maturity of one year or less, excluding data for a number of nonreporting countries.

Debt-service payments cover principal and interest on long-term debt and interest on short-term debt.

Net external borrowing from private creditors divided by the sum of current account deficits, reserve accumulation or use, and recorded errors and omissions (presumed to reflect unrecorded capital flows).

Source: International Monetary Fund.

Total debt in this table covers public and publicly guaranteed debt and, where available, private nonguaranteed debt. Details may not add to totals, owing to rounding.

Debt with an original maturity of one year or less, excluding data for a number of nonreporting countries.

Debt-service payments cover principal and interest on long-term debt and interest on short-term debt.

Net external borrowing from private creditors divided by the sum of current account deficits, reserve accumulation or use, and recorded errors and omissions (presumed to reflect unrecorded capital flows).

During the 1970s, the share of capital flows from private financial institutions in the net external financing of non-oil developing countries rose from about 40 percent in 1973 to an average of 61 percent during 1980–81. There was also a significant change in the terms of private flows, reflecting the move toward syndicated bank loans at variable interest rates and away from more traditional types of private finance such as bonds, suppliers’ credits, and direct investment (Chart 1). In addition, the increased integration of banks based in some non-oil developing countries with the global interbank market facilitated a rapid expansion in the short-term debt of these countries. This expansion was accompanied by a sharp decline in the protection provided by gross international reserves, which fell from 224 percent of short-term debt at the end of 1973 to only 85 percent at the end of 1981.

Chart 1.Terms on International Bank Lending Commitments, 1973–84

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

1 New publicized medium- and long-term international bank credit commitments.

Debt-service payments of non-oil developing countries increased fivefold from 1973 to 1981. The higher volume of external debt accounted for two thirds of the increase. The larger share of total debt contracted at variable interest rates, combined with the steep rise in nominal international interest rates in the late 1970s, was responsible for the remaining increase. The ratio of debt-service payments to exports of goods and services for non-oil developing countries rose from 16 percent in 1973 to 22 percent in 1981. The debt-service ratio rose even faster for the major borrowers, reaching 35 percent in 1981.

Differences in external debt developments across regional groups of non-oil developing countries provide useful insights into the incidence of debt-servicing difficulties, even though developments varied considerably among countries in these groupings.

In Africa, excluding South Africa, external debt expanded more rapidly than in any other region between 1973 and 1981. While debt-service payments by African countries rose more slowly than elsewhere, reflecting the preponderance of official loans contracted on concessional terms, the debt-service ratio of African countries nevertheless increased more sharply, reflecting their markedly weaker export performance. Asian countries, unlike other non-oil developing countries, recorded a faster growth of exports than external debt from 1973 to 1981, and their debt-service ratio was the same in 1981 as it was in 1973—9 percent.

Countries in the Western Hemisphere began and ended this period with the highest debt indicators of any region. In 1981, their short-term debt was equivalent to 57 percent of imports; the ratio for Asian countries by comparison, was only 15 percent. The international reserves of countries in the Western Hemisphere covered about 60 percent of their short-term debt (compared with 155 percent for Asian countries), while their external debt was equivalent to about 224 percent of exports, and the ratio of their debt-service payments to exports was 45 percent.

Following the emergence of debt-servicing difficulties among major borrowers in the second half of 1982, the growth in the external debt of non-oil developing countries slowed to about 8 percent per annum during 1982–84 from about 20 percent during 1973–81. The growth in debt owed to official creditors decelerated to 11 percent during 1982–84 from an annual average of 17 percent during the preceding eight years, but the growth in external debt owed to private creditors during 1982–84 fell more sharply—to an annual average rate of 7 percent, only one third of that experienced during 1973–81.

This deceleration reflected a decline in spontaneous lending by banks and in the contribution of official flows, as well as the reduced financing needs of developing countries as the result of adjustment policies. As payments difficulties spread among developing countries, cross-border bank lending to these countries decelerated to 11 percent in 1982 and to 7 percent in 1983 (Table 54 and Chart 2). (These data on bank lending to developing countries exclude countries that are offshore banking centers.) In 1984, lending slowed further, to approximately 3 percent. International bank lending to non-oil developing countries amounted to $17 billion in 1984 compared with $31 billion in 1983, while bank claims on oil exporting countries as a group declined by $2 billion during 1984 after having increased by $7 billion in 1983 (Table 2; Tables 6 through 9; and Chart 3).

Chart 2.Growth Rates of International Bank Claims, 1976–84

Percent

Sources: Bank for International Settlements, International Banking Developments.

Note: Lending is measured in U.S. dollars excluding changes attributed to exchange rate movements for the period since 1976.

Table 2.Cross-Border Bank Lending and Deposit Taking, 1982–841(Changes in billions of U.S. dollars)
198219831984
Lending to2186139187
Industrial countries12392114
Of which: United States613836
Developing countries513815
Oil exporting1072
Non-oil413117
Offshore centers25730
Other transactors–166
Unidentified borrowers–12–421
Deposit taking from3188161191
Industrial countries15088131
Of which: United States1073211
Developing countries42925
Oil exporting1332
Non-oil173223
Offshore centers252619
Other transactors4102
Unidentified depositors6814
Change in net claims on4
Industrial countries–264–16
Of which: United States46625
Developing countries479–10
Oil exporting23104
Non-oil2416
Offshore centers–1911
Other transactors–5–44
Unidentified (net)–18–127
Net errors and omissions520–53
Sources: International Monetary Fund, International Financial Statistics (IFS); and Fund staff estimates.

Data on cross-border lending and deposit taking are derived from stock data on the reporting countries’ liabilities and assets after allowing for exchange rate movements. U.S. data are not corrected for valuation changes attributed to exchange rate movements; developing country figures exclude offshore centers (which are the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, and Singapore); “other transactors” are transactors included in IFS measures for the world, to enhance global symmetry, but excluded from IFS measures for “all countries” (and comprise changes in identified cross-border bank accounts of centrally planned economies (excluding Fund members), and of international organizations); the “unidentified” entry is calculated as the difference between the amounts that countries report as their banks’ positions with nonresident nonbanks in their monetary statistics and the amounts that banks in major financial centers report as their positions with nonbanks in each country; while net errors and omissions are the difference between global measures of cross-border interbank lending and deposit taking. Details may not add, owing to rounding.

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

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

Lending to, minus deposit taking from.

Calculated as the difference between global measures of cross-border interbank lending and deposit taking.

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

Data on cross-border lending and deposit taking are derived from stock data on the reporting countries’ liabilities and assets after allowing for exchange rate movements. U.S. data are not corrected for valuation changes attributed to exchange rate movements; developing country figures exclude offshore centers (which are the Bahamas, Bahrain, the Cayman Islands, Hong Kong, the Netherlands Antilles, Panama, and Singapore); “other transactors” are transactors included in IFS measures for the world, to enhance global symmetry, but excluded from IFS measures for “all countries” (and comprise changes in identified cross-border bank accounts of centrally planned economies (excluding Fund members), and of international organizations); the “unidentified” entry is calculated as the difference between the amounts that countries report as their banks’ positions with nonresident nonbanks in their monetary statistics and the amounts that banks in major financial centers report as their positions with nonbanks in each country; while net errors and omissions are the difference between global measures of cross-border interbank lending and deposit taking. Details may not add, owing to rounding.

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

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

Lending to, minus deposit taking from.

Calculated as the difference between global measures of cross-border interbank lending and deposit taking.

Chart 3.International Lending to Developing Countries Through Banks and Bond Markets, 1982–84

Sources: Data for cross-border bank lending to developing countries are based on the International Banking Statistics of the International Monetary Fund. Data for international bond issues and placements are based on Financial Statistics Monthly of the Organization for Economic Cooperation and Development.

Note: Cross-border bank lending is measured in U.S. dollars excluding changes attributed to exchange rate movements. Bond issues and placements are unadjusted for redemptions and double counting, owing to bank purchases of bonds.

With the recent deceleration in bank lending, issues and placements of international bonds have become, in relative terms, an important source of foreign capital for some developing countries (Table 10 and Chart 3). Developing countries issued $5.3 billion of bonds in 1984. Issuance of bonds in 1984, however, was mainly accounted for by ten developing countries.

The cumulative increase of $53 billion in cross-border bank claims on developing countries during 1983–84 included $23 billion of “concerted” lending to a number of Western Hemisphere countries and to Yugoslavia. (Concerted bank lending refers to equiproportional increases in bank exposure to a restructuring country, coordinated by a bank advisory committee; see the glossary for details.) Almost all the flows to countries in the Western Hemisphere in these two years took the form of concerted lending, although a very modest amount of spontaneous trade financing to these countries appears to have resumed recently. Spontaneous lending has continued to a number of developing countries in Asia and Europe, but on a generally reduced scale. Reflecting these developments, the share of the net financing requirements of non-oil developing countries covered by private sources during 1983–84 was about 25 percent, compared to an average of 61 percent during 1980–81.

As external flows decreased in 1983–84, many developing countries embarked on economic adjustment programs and restructured debt to official and bank creditors. As a result, developing countries were able to finance their reduced current account deficits and to record a larger accumulation of international reserves than during any two-year period since 1978–79 ($29 billion).

The change in the positions of these countries vis-à-vis commercial banks was particularly striking. Total deposits of developing countries with the international banking system rose by $29 billion in 1983 and by $25 billion in 1984. The increase in deposits in 1984 was almost entirely accounted for by the non-oil developing countries. This level of depositing reflected a substantial accumulation of international reserves by some countries, as well as an increase in other external assets. As a result of these developments in lending and deposit-taking, the net liabilities of developing countries to international banks were reduced by $10 billion in 1984—a marked contrast to the substantial increase in net liabilities registered in the preceding years.

Sources of Payments Difficulties

The number of countries approaching their creditors for a debt restructuring reached a record level during 1982–84 (Tables 3 and 4). Most of the countries experiencing payments difficulties have been non-oil developing countries, including middle-income countries, but debt-servicing problems have also been encountered by several oil exporting countries and by certain non-Fund members with centrally planned economies. In most countries, the emergence of debt-servicing problems reflected a combination of factors: inappropriate domestic policies, inadequate external debt management, overlending by commercial banks (which was followed by a sharp fall in lending), and sharply adverse external conditions.5 For some countries, the onset of debt-servicing difficulties was precipitated by regional events.

Table 3.Chronology of Bank Debt Restructuring Cases and Bank Financial Packages, 1978–June 19851
Agreement reached 2

(By year and month of agreement)
1978

Peril—June

Jamaica—Seplember

Peru—December

1979

Jamaica—April

Turkey—June 3

Turkey—August3

1980

Peru—January

Togo—March

Zaire—April

Bolivia—August, December (temporary deferments)

Nicaragua—December

1981

Bolivia—April

Jamaica—June 3

Madagascar—July, November

Turkey—August

Nicaragua—December

Sudan—December

1982

Honduras—January

Nicaragua—March

Sudan—March

Turkey—March

Guyana—June (temporary deferment)
1982 (continued)

Liberia—December

Romania—December

1983

Zaire—January (temporary deferment)

Brazil—February 3

Bolivia—March, October (deferments)

Malawi—March

Sudan—April (modification of 1981 agreement)

Romania—June

Chile—July 3

Guyana—July (temporary deferment)

Nigeria—July

Peru—July 3

Uruguay-—July

Mexico—August 3,6

Costa Rica—September 3

Dominican Republic—September 4

Madagascar—September5,6

Nigeria—September

Yugoslavia—September

3

Ecuador—October 3

Togo—October

1984

Brazil—January3

Sierra Leone—January
1984 (continued)

Guyana-—January, July (temporary deferments)

Morocco—January 4

Nicaragua—February

Peru—February 4

Senegal—February

Niger—March

Mexico—April (new financing only)6

Sudan—April (modification of 1981 agreement)

Yugoslavia—May

Jamaica—June

Zaire—June (temporary deferment)

Mexico—September4

Venezuela—September 4

Philippines—October 3,4,7

Madagascar—October

Chile—November (temporary deferment)

Argentina—December 3,4

Ecuador—December 4

Honduras—December 4

Uruguay—December (temporary deferment)

Zambia—December4

Costa Rica—January 4

Ivory Coast—March

Senegal—May 4
Under negotiation

(By year of approach to banks)
1983

Liberia

1984

Brazil

Dominican Republic
1984 (continued)

People’s Republic of Mozambique

Panama

Peru 8

Yugoslavia
1985

Nicaragua 9

Uruguay
Sources: Restructuring agreements; and Fund staff estimates.

“Restructuring” covers rescheduling and also certain refinancings.

Agreement either signed or reached in principle. See Glossary in Appendix II for definitions of the two terms.

The restructuring agreement includes new financing.

Agreed in principle or tentative agreement with bank’s steering or advisory committee.

The agreement was officially signed in October 1984.

The 1983 restructuring also covered maturities falling due in 1984.

The agreement in principle covers 1985 and 1986 maturities.

Discussions on the April 1984 restructuring agreement reached in principle are continuing.

Refers to amount previously restructured during 1980–82.

Sources: Restructuring agreements; and Fund staff estimates.

“Restructuring” covers rescheduling and also certain refinancings.

Agreement either signed or reached in principle. See Glossary in Appendix II for definitions of the two terms.

The restructuring agreement includes new financing.

Agreed in principle or tentative agreement with bank’s steering or advisory committee.

The agreement was officially signed in October 1984.

The 1983 restructuring also covered maturities falling due in 1984.

The agreement in principle covers 1985 and 1986 maturities.

Discussions on the April 1984 restructuring agreement reached in principle are continuing.

Refers to amount previously restructured during 1980–82.

Table 4.Official Multilateral Debt Restructurings, 1975–851
Debtor Country2Date of AgreementForumNumber of Participating CreditorsAmount Rescheduled (Estimate, in millions of U.S. dollars)
1975
Chile IMay 6Paris Club7230
1976
Zaïre IJune 16Paris Club11270
1977
Zaïre IIJuly 7Paris Club11170
Sierra Leone ISeptember 15Paris Club639
Zaïre IIIDecember 1Paris Club1040
1978
Turkey IMay 20OECD141,300
Gabon IJune 20Special task force563
Peru INovember 3Paris Club14420
1979
Togo IJune 15Paris Club9260
Turkey IIJuly 25OECD171,200
Sudan INovember 13Paris Club11487
Zaïre IVDecember 11Paris Club141,040
1980
Sierra Leone IIFebruary 8Paris Club737
Turkey IIIJuly 23OECD173,000
Liberia IDecember 19Paris Club835
1981
Togo IIFebruary 20Paris Club11232
Madagascar IApril 30Paris Club11140
Central African Republic IJune 12Paris Club672
Zaïre VJuly 9Paris Club12500
Senegal IOctober 12Paris Club1375
Uganda INovember 18Paris Club630
Liberia IIDecember 16Paris Club830
1982
Sudan IIMarch 18Paris Club1380
Madagascar IIJuly 13Paris Club11107
Romania IJuly 28Paris Club15234
Malawi ISeptember 22Paris Club625
Senegal IINovember 29Paris Club1274
Uganda IIDecember 1Paris Club419
1983
Costa Rica IJanuary 11Paris Club10200
Sudan IIIFebruary 4Paris Club15536
Togo IIIApril 12Paris Club11300
Zambia IMay 16Paris Club12375
Romania IIMay 18Paris Club11736
Mexico IJune 22Creditor Group151,000
Central African Republic IIJuly 8Paris Club513
Peru IIJuly 26Paris Club20466
Ecuador IJuly 28Paris Club13142
Morocco IOctober 25Paris Club121,489
Malawi IIOctober 27Paris Club526
Niger INovember 14Paris Club536
Brazil INovember 23Paris Club162,695
Zaïre VIDecember 20Paris Club131,497
Senegal IIIDecember 21Paris Club1172
Liberia IIIDecember 22Paris Club817
1984
Sierra Leone IIIFebruary 8Paris Club1125
Madagascar IIIMarch 23Paris Club1389
Sudan IVMay 3Paris Club15269
Ivory Coast IMay 4Paris Club12356
Yugoslavia IMay 22Creditor Group15500
Peru IIIJune 5Paris Club18704
Togo IVJune 6Paris Club1175
Jamaica IJuly 16Paris Club10105
Zambia IIJuly 20Paris Club13253
People’s Republic of Mozambique IOctober 25Paris Club12404
Niger IINovember 30Paris Club526
Liberia IVDecember 17Paris Club717
Philippines IDecember 20Paris Club15750
1985
Argentina IJanuary 16Paris Club162,000
Senegal IVJanuary 18Paris Club11117
Somalia IMarch 6Paris Club5122
Costa Rica IIApril 22Paris Club1078
Ecuador IIApril 24Paris Club13450
Mauritania IApril 27Paris Club858
Yugoslavia IIMay 243Creditor Group16625
Sources: Agreed Minutes of debt reschedulings; and Fund staff estimates.

The reschedulings exclude debt restructurings conducted under the auspices of aid consortia and official debt reschedulings that involved non-Fund members.

Roman numerals indicate, for each country, the number of debt reschedulings from 1975.

Agreement in principle on the rescheduling of the debt owed by Yugoslavia was reached on March 25, 1985, and the Agreed Minute was signed on May 24, 1985.

Sources: Agreed Minutes of debt reschedulings; and Fund staff estimates.

The reschedulings exclude debt restructurings conducted under the auspices of aid consortia and official debt reschedulings that involved non-Fund members.

Roman numerals indicate, for each country, the number of debt reschedulings from 1975.

Agreement in principle on the rescheduling of the debt owed by Yugoslavia was reached on March 25, 1985, and the Agreed Minute was signed on May 24, 1985.

Expansionary fiscal policies were frequently a major cause of excessive demand that led to a deterioration in current account positions, while foreign borrowing was often not effectively utilized. Large fiscal deficits were financed by substantial external borrowing and a rapid rise in net domestic credit to the central government. Domestic bank credit was also increased to support inappropriate policies of parastatals. As a result, total domestic credit expansion was often excessive. Restructuring countries experienced much faster growth in domestic credit during the three to five years prior to the restructuring than did nonre-structuring countries.

Distortions in relative prices, such as exchange rates, interest rates, and producer prices, depressed domestic savings rates and led to misallocation of resources. The real effective exchange rate of restructuring countries typically appreciated significantly during the two years prior to a request for debt restructuring, compared with virtually no appreciation for nonrestructuring countries as a group. This appreciation contributed to a deterioration in the trade account and, in conjunction with depressed real interest rates in domestic money markets, also induced capital outflows. For countries in the Western Hemisphere, negative errors and omissions—frequently an indicator of such outflows—rose from 4 percent of exports during 1977–79 to 19 percent during 1980–82, when they were equivalent to 37 percent of these countries’ net external borrowing.

In addition to the impact on external borrowing of the macroeconomic policies cited above, external debt and international reserve management policies also contributed to debt-servicing difficulties. The crucial factor lay not in the maturity structure of the debt, but in the relationship between this structure and the liquidity available to the country to meet its amortization commitments. At the end of 1981, countries that subsequently restructured their debt had on average a smaller share of their total bank debt falling due in the coming year than did nonrestructuring countries (Table 11), but the ratio of short-term bank debt to assets with banks was four times higher for restructuring countries than for nonrestructuring countries (Table 12). The ratio of undrawn credit lines to outstanding bank debt for restructuring countries was half the ratio prevailing for nonrestructuring countries (Table 13). Thus, restructuring countries were generally more vulnerable to unexpected changes in the international environment.

The enhanced access to international capital markets that occurred during the 1970s increased countries’ ability to finance external imbalances, including those resulting from inappropriate domestic policies. Banks continued to expand their lending to countries pursuing inappropriate policies for several reasons. In particular, they underestimated the risk associated with sovereign lending and were not sufficiently forward-looking in their evaluation of creditworthiness. The balance sheet ratios of commercial banks deteriorated substantially during the years preceding the spread of sovereign debt problems (Chart 4 and Table 14).

Chart 4.Selected Balance Sheet Data for U.S. Banks, 1977–84

Source: Federal Financial Institutions Examination Council, Country Exposure Lending Surveys.

Note: NODCs refers to non-oil developing countries.

A number of sharply adverse and protracted developments in the world economy confronted the non-oil developing countries during 1979–82 and contributed to their payments problems (Chart 5). Higher prices for petroleum and lower prices of other primary commodities led to a marked deterioration in their terms of trade. The prolonged recession in industrial countries, as well as the intensification of protectionism in these countries, adversely affected the demand for exports from non-oil developing countries. At the same time, the sharp rise in real international interest rates, following a period of low real interest rates, also contributed to their debt-servicing difficulties. These external shocks affected countries to differing degrees. However, they do not appear in general to have been more severe for restructuring countries than for other developing countries.

Chart 5.Selected Economic and Financial Indicators

Source: International Monetary Fund, World Economic Outlook, April 1985: A Survey by the Staff of the International Monetary Fund (Washington).

1 Nominal six-month Eurodollar deposit rate deflated by import unit value index of developing countries.

There were significant differences in the policy response of those developing countries that subsequently restructured their debt and those that did not. Some countries implemented adjustment policies only after a delay, or on a scale insufficient to restore a sustainable external position. In an environment where bank lending was both abundant and highly competitive, countries’ pursuit of inappropriate policies was not initially constrained by the degree of availability of external financing.

In sum, inappropriate economic policies increased the vulnerability of restructuring countries to the external shocks that occurred in 1979–81. The impact of these policies was seriously compounded by inadequate country risk assessment on the part of creditors. Actions to redress these difficulties thus needed to encompass adjustment programs in debtor countries, policies by industrial countries to foster more stable financial markets and a sustained growth in world trade, efforts to restore the soundness of the international banking system, and a strengthening of the Fund’s surveillance procedure.

Coordinated Approach

The spread of serious debt-servicing difficulties among developing countries from mid-1982 posed a threat to the economies of the countries affected, and also to the international financial system. To resolve these difficulties, a coordinated effort by the debtor countries, official and bank creditors, and international financial institutions was necessary. This effort addressed three principal concerns: how to link financial support effectively to economic policies that would restore countries’ creditworthiness; how to provide payments relief in ways that would rebuild debtor-creditor relations; and how to coordinate support among large and diverse creditor groups. These concerns guided both creditor and debtor countries, commercial banks, and international institutions in arranging financing to support debtor country policies that were designed to regain viable external positions and to help restore sustained economic growth.

Effective adjustment policies in debtor countries were clearly necessary to restore countries’ credit-worthiness and lay the basis for renewed growth, encouraging a resumption of bank lending, export credit flows, and official development assistance. Adjustment policies were also necessary to pave the way for a return of flight capital, and for an increase in direct foreign investment and other non-debt-creating flows. Prompt implementation of policies affecting both the demand and supply side of developing countries’ economies were seen as key to the return to more normal access to external flows. In this connection, project, sector, and structural adjustment loans from the World Bank were an important complement to Fund-supported economic adjustment programs.

Appropriate policies in industrial countries, because of their impact on global economic and financial conditions, were also recognized as essential to facilitate the resolution of external payments difficulties confronting developing countries. A sustained improvement in the external finance of developing countries was seen to depend crucially on the pursuit by industrial countries of policies favorable to a recovery of international trade and more open markets for developing countries’ exports, and to lower and less volatile real interest rates in financial markets. Emphasis was laid on the need for sound fiscal policies in industrial countries to contribute to lower real interest rates. Policies to foster efficiency and structural flexiblity were also needed to help restrain protectionist pressures, avoiding the creation of barriers that inhibit developing countries from earning the necessary foreign exchange to service their external obligations.

From the outset of the debt problems, creditors mounted a coordinated endeavor to support the adjustment efforts of developing countries and to secure an appropriate balance between financing and adjustment, while meeting the need for equitable burden-sharing among creditors. For countries engaged in restructuring their debt, financial packages involving support from bank and official creditors were assembled on a case-by-case basis within the context of Fund-supported economic adjustment programs, thus tailoring the mix between adjustment and financing to each country’s circumstances and prospects. As negotiations proceeded on adjustment programs, authorities in financial market countries and the BIS were instrumental in providing immediate, temporary financial support through bridging loans.

Official debt reschedulings typically covered both principal and interest payments on medium-term and long-term loans. Financial packages arranged with bank creditors generally consisted of a debt restructuring covering amortization payments on medium-term and long-term debt, together with any arrangements necessary to ensure the maintenance of short-term credit lines. Where appropriate, a “new money” or concerted lending package was also included; these packages involved equiproportional increases in bank exposure to a restructuring country, and were coordinated by bank advisory committees in conjunction with the implementation of Fund-supported adjustment programs. (Table 15 gives details of some recent concerted lending packages.)

While the mobilization of concerted bank lending for certain countries was an arduous process, experience underscored the advantages of this approach in bringing debtors and creditors into a dialogue and in focusing attention on achieving a proper balance between financing and adjustment. Approaches that would have involved limiting current interest payments, for instance, were generally not adopted by bank advisory committees. Such approaches did not seem favored by debtor countries that desired to return to international capital markets, on the grounds that such actions could severely damage their prospects for future access to bank credit. Maintaining lending to developing countries on terms as close as possible to those in financial markets also appeared a logical way to minimize the damage to the international banking system and to avoid a further weakening in the capacity of international banks to intermediate flows to developing countries over the medium term. A sound banking system, as well as a correction of imbalances in countries’ economies, was seen as essential to achieving sustained growth in world trade and in the economies of member countries.

To reinforce the soundness of the international banking system and to enhance the medium-term prospects for lending, a concerted effort to strengthen banks’ balance sheets was undertaken by bank supervisors, cooperating in the Cooke Committee.6 Bank supervisors had become concerned with the deterioration in capital-asset ratios and in asset quality, and with the implications this could hold for the stability of the financial system. While responding flexibly to the problems raised by the restructurings and new money packages, supervisory authorities in major financial centers sought to increase capital-asset ratios and in a number of cases encouraged banks to build up reserves and make specific provisions against lending risks. The BIS provided a forum for central banks to coordinate their response.

Based on this approach to the debt problem, considerable progress has been made in resolving developing countries’ payments difficulties since 1982. The systemic risks present at that time have been reduced. In many debtor countries, a foundation has been laid for adjustment over the medium term. Primary attention has now turned to the longer-run implications of continuing high debt-service burdens for the debtors’ prospects of achieving durable growth, attracting renewed capital flows, and withstanding adverse external developments. In this regard, the situation and prospects of individual countries vary considerably, and actions by official and bank creditors, as well as by the debtor countries themselves, have reflected these differences.

Thus, for countries at an early stage in resolving their debt-servicing difficulties, creditors have generally maintained a link, on a year-to-year basis, between financial packages and adjustment programs supported by an upper credit tranche arrangement with the Fund. Creditors have sought this link to secure a durable improvement in a debtor country’s payments position. Financial flows to support adjustment policies have been determined on a case-by-case basis, and on terms that have reflected a country’s debt-servicing capacity and economic prospects. This approach has been shown to be effective in facilitating orderly adjustment and laying the basis for sustainable economic growth.

Creditors have, however, been willing to enter into longer-term arrangements with countries that have made substantial progress in adjusting their economies in order to speed their return to more normal access to commercial credit and to sustain their economic recovery. Specifically, commercial banks have agreed to smooth the bunching of future amortization payments, which was seen as an obstacle to normalizing creditor-debtor relations. To this end, debtor countries and banks have negotiated multiyear debt restructuring agreements (MYRAs) with extended maturities and have devised monitoring procedures to help protect banks’ assets by linking the restructuring process to the country’s pursuit of economic policies consistent with a viable external payments position. To facilitate agreement on bank MYRAs, certain member countries have requested the Fund to undertake “enhanced surveillance” of their economies, which involves semiannual consultations between the country and the Fund. These countries sought permission to provide Fund consultation reports to their bank creditors as part of the banks’ monitoring procedures in the period when they would no longer be using Fund resources.

Official creditors also have responded flexibly to the financing needs of countries undertaking adjustment programs. In particular, meeting under the aegis of the Paris Club, official creditors have reached agreements that have reflected the particular circumstances of individual countries. Most recently, in April 1985, an official MYRA was agreed with Ecuador, on a basis that also may include specified Fund surveillance procedures.

Although agreement by the Fund to undertake enhanced surveillance of a country’s economy has facilitated agreement on MYRAs, the Fund has made clear that this should not be construed as a signal to creditors that they can relax their own monitoring of a country’s economic performance and prospects. Creditor banks, in particular, need to arrive at their own judgments before making independent lending decisions. Fund staff reports made available to creditors under enhanced surveillance cannot be expected to provide “on-off” indications for financing decisions. The nature of the Fund’s enhanced surveillance procedures is discussed in Section II in connection with bank MYRAs.

While many countries have made great strides in resolving their debt problems, some have continued to experience protracted debt-servicing difficulties. In these cases, comprehensive adjustment measures have been needed to address the sources of the problem and to lead to an eventual restoration of durable growth. Financial support on appropriate terms has remained necessary to support their adjustment efforts, with the use of the Fund’s resources—when justified—largely limited to a catalytic role. In these respects, the difficulties of low-income countries, especially in Africa, have continued to require special attention. Official creditors have exercised considerable flexibility by, in some cases, effectively rescheduling close to 100 percent of principal and interest falling due. In such cases, little scope remains for providing more financing through debt relief. Any additional assistance to support adjustment programs in these countries would, therefore, need to take the form of new bilateral or multilateral aid flows.

Thus, while considerable progress has been made toward resolving debt-servicing difficulties and reducing systemic risk, achievements and prospects vary considerably among individual countries, and there are no grounds for complacency. Effective economic policies in debtor countries will help to restore their creditworthiness and should result in inflows of more diversified external capital than in recent years, including a higher proportion of direct foreign investments and other non-debt-creating flows.7 Continuing improvement in developing countries’ balance of payments positions and adequate flows of external financing will also depend on appropriate policies in industrial countries. Balanced growth in the industrial economies, an open trading system, and continued collaboration between debtors and creditors remain crucial to solving external debt problems and to restoring developing countries’ access to capital flows.

As countries continue to move away from the import compression phase of adjustment, there will be greater potential for bank lending to support trade and project activities. In addition, the scope for governments and their agencies to stimulate financial flows will increase. At present, commercial banks generally desire a very modest growth in exposure to developing countries, at least in the near term, with a particular view to reducing their exposure to some major borrowers relative to their capital and reserves; those ratios have already been reduced significantly from their very high levels of 1981–82. Modest bank lending would coincide with the desire of many developing countries, including major borrowers, to restrain the growth in their bank debt given the current high real interest rates and changed perceptions of risks in the international environment.

In this environment, medium-term balance of payments credits will remain an element in international lending, as will further concerted financing packages where appropriate, but general balance of payments lending is unlikely to reemerge on the scale that prevailed before the outbreak of widespread debt problems in 1982. The aim of banks to reduce their risk-adjusted exposure relative to capital is likely to result in a larger share of total lending to developing countries being accounted for by trade financing and project-related loans. One reason banks prefer such loans is that they are perceived to have lower risk. Banks are also seeking a greater synergy between their foreign and domestic lending operations; their lending to developing countries will tend to support the export activities of their customers in industrial countries. In this way, business related to these customers is viewed as a way to raise returns and, in some cases, it means that the risk will be shared with domestic customers or export credit agencies.

Governments can take a range of measures to restore more normal debtor-creditor relations and, in particular, to foster normal trade financing. In appropriate circumstances, multiyear restructurings of debt owed to official creditors could help restore confidence in a country’s ability to service new credits. Governments and their agencies can also offer export credit guarantees to facilitate new trade financing. In this connection, the policies of export credit agencies will play an important role in influencing future bank lending for trade and projects. Export credit guarantees can help restructuring countries that have pursued successful adjustment efforts ease back into international capital markets.8

As countries’ payments situations become more normal, the role of the multilateral agencies will remain important. As lending for projects resumes, the World Bank can continue to play a valuable role through its appraisal of project and sector policies and by helping to attract financing to productive endeavors, both through cofinancing and through general collaboration with creditors. Effective surveillance by the Fund of a member country’s economic policies will also be essential to ensure that current debt-servicing problems are resolved, and that, over time, past problems associated with commercial bank lending do not reemerge.

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