III. Capital Market Financing for Developing Countries
Author: International Monetary Fund
Language:
English
Keywords:
WEFS; market borrower; debt-servicing problem; commercial bank debt; Dem. rep.; country classification; a number of bank; debt service reduction; reduction operations; bank claim; secondary market; Emerging and frontier financial markets; Debt service; Debt conversion; Stock markets
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Abstract

In the early years after the onset of the debt crisis in 1982, developing countries with debt problems tended to have access to capital market financing primarily in the form of reschedulings of principal obligations falling due and, in some cases, arrangement of new loans—usually on a concerted basis where new money was provided by banks as part of a collective effort including support from official sources. This approach was viewed as the appropriate response to what was regarded primarily as a “liquidity” problem faced by debtors, and was consistent with the weak underlying financial position of the major commercial banks that precluded wholesale writedowns of exposure to problem debtors.

In the early years after the onset of the debt crisis in 1982, developing countries with debt problems tended to have access to capital market financing primarily in the form of reschedulings of principal obligations falling due and, in some cases, arrangement of new loans—usually on a concerted basis where new money was provided by banks as part of a collective effort including support from official sources. This approach was viewed as the appropriate response to what was regarded primarily as a “liquidity” problem faced by debtors, and was consistent with the weak underlying financial position of the major commercial banks that precluded wholesale writedowns of exposure to problem debtors.

The traditional packages, however, proved increasingly difficult to assemble. The cohesion of commercial banks weakened, as differences in their international commercial strategies, financial exposure, and perceptions of the debt problem increasingly asserted themselves. Consequently, a small number of reluctant banks often were able to hold up the implementation of restructuring proposals agreed to by debtor countries and the majority of their bank creditors. At the same time, there was growing concern with countries' increasing debt burdens, and their implications for the restoration of sustained growth and medium-term balance of payments viability. These factors led to the emergence of additional financing instruments that aimed to reconcile, within a market-based framework, some of the demands of creditors and debtors. These instruments took the form, inter alia, of debt-equity conversions, cash buy-backs, and debt securitization.

The application of the resulting menu of options provided, in turn, an important basis for recent actions to strengthen the debt strategy. These actions followed proposals by U.S. Treasury Secretary Brady in February 1989 that official support be provided to fund market-based debt and debt service reduction for countries implementing growth-oriented adjustment programs. Since that time, three countries—Costa Rica, Mexico, and the Philippines—have agreed with banks on restructuring packages that have included substantial elements of debt and debt service reduction, and a number of other countries are actively negotiating similar packages with bank creditors. Bank participation in these packages has been facilitated by the substantial reserves that they have built up in recent years against losses to problem debtors and by actions by accounting, regulatory, and tax authorities to clarify the treatment of debt and debt service reduction operations.16

Developing Country Access to International Capital Markets

There were significant shifts in 1988 and 1989 in international capital market financing of developing countries (excluding offshore centers). In 1988, external bank and bond claims on these countries declined by $7 billion, after having risen by $22 billion in the previous year (Table 7). Banks' reluctance to participate in general purpose medium-term financing for heavily indebted countries and a high rate of debt conversion were major factors behind the decline of $9 billion in total cross-border commercial bank claims on developing countries in 1988, compared with an increase of $21 billion in 1987 (Chart 6).17 This more than offset a slight increase in net recourse to bond financing with net issues amounting to an estimated $2 billion, some $1 billion above the previous year's level.

Table 7.

International Lending, 1981–Third Quarter 1989

(In billions of U.S. dollars)

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

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

Total changes in bank claims include offshore centers, international organizations, and other non-Fund members, as well as industrial and developing countries.

Estimates based on BIS and OECD data.

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

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

Chart 6.
Chart 6.

Bond Issues and Long-Term Commitments of Credits and Facilities to Capital Importing Developing Countries, 1981–89

(In billions of U.S. dollars)

Sources: Organization for Economic Cooperation and Development, Financial Statistics Monthly; and Fund staff estimates.1 Includes a facility arranged for Mexico.

In 1989, information for the first three quarters of the year shows a $6 billion increase in external bank and bond claims on developing countries, as some countries continued to borrow on bond markets, while bank claims also rose. The turnaround in bank claims reflected a modest increase in spontaneous lending to countries not experiencing debt-servicing difficulties, the curtailment of debt-conversion programs in many countries, and an accumulation of interest arrears in some countries. However, new concerted lending was limited as the market digested new initiatives to strengthen the debt strategy.

Banks' Claims on Developing Countries

International banks' activities in developing countries' in 1988 and the first three quarters of 1989 were dominated by a sharp decline in outstanding claims on the fifteen heavily indebted countries. Specifically, after increasing by $2.4 billion in 1987, owing mainly to the accumulation of interest arrears of a few countries, claims fell by $15.6 billion in 1988 and a further $2.4 billion in the first three quarters of 1989 (Table A23). Gross concerted loan disbursements amounted to $6 billion in 1988—the bulk of which was to Brazil and Mexico—and dwindled to $600 million in 1989. These disbursements were more than offset by cash principal repayments and, more important, debt sales, conversions, and settlement of interest arrears, as illustrated by the cases of Brazil and Mexico, the two countries which accounted for the bulk of the decline in bank claims. The settlement by Brazil of interest arrears to banks ($3.4 billion), combined with debt conversions, was reflected in a $5.5 billion net reduction in bank claims in 1988. Bank claims in Brazil rose in 1989, reflecting in part the re-emergence of arrears in the third quarter. In Mexico's case, the recorded fall of almost $9 billion in 1988 and the first three quarters of 1989 was heavily influenced by debt sales and conversions estimated to have involved debt with face value of at least $5 billion. Bank claims on other heavily indebted countries also declined in this period, with the exception of those on Argentina (reflecting the accumulation of interest arrears).

After increasing by $18.3 billion in 1987, banks' cross-border claims on other developing countries and regions grew by $6.7 billion in 1988. This slowdown primarily reflected developments in Taiwan Province of China which, following a strengthening of its external performance, reduced its outstanding liabilities to banks by $1.7 billion in the year, compared with an increase of $13.3 billion during 1987. This reduction was offset only in part by increased credits to other borrowers, notably China and a number of oil exporting countries in the Middle East, including Saudi Arabia and the United Arab Emirates. In the first three quarters of 1989, bank claims on other developing countries and regions rose by $7.4 billion, as Korea and Taiwan Province of China both re-entered the market, which more than offset a reduction in claims on China. With respect to African and European developing countries, the stock of bank claims declined by $2.1 billion and $3.7 billion, respectively, in 1988 and in the first three quarters of 1989. Algeria, Nigeria, and South Africa accounted for the bulk of the fall in bank claims on African countries; in the case of Europe, the decline in part reflected Romania's repayment of its external debt in convertible currencies.

Developing countries' deposits held with international banks continued to rise in 1988 and the first three quarters of 1989, thereby reinforcing the deposit accumulation of 1987. The increase in deposits was concentrated in the developing countries other than the 15 heavily indebted countries. Accordingly, the developing countries' net liability position with regard to cross-border banks, which had fallen by $29 billion in 1987, declined by a further $44 billion in 1988 and by $23 billion in the first three quarters of 1989. The 15 heavily indebted countries and other developing countries accounted for roughly equal shares of this decline.

Chart 7.
Chart 7.

Terms of International Bank Lending Commitments, 1977–89

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

Terms

Average spreads on bank lending commitments to developing countries declined substantially between 1983 and 1988, for both spontaneous flows and financing in the context of restructuring agreements (Table A26 and Chart 7). In 1988, average spreads over LIBOR averaged 57 basis points for spontaneous new loan commitments, 83 basis points for concerted commitments, and 81 basis points for restructuring of existing debt. In 1989, average spreads on spontaneous commitments increased sharply to 72 basis points, but this seems to have reflected a shift in composition of borrowers rather than increasing spreads for individual countries. Spreads on concerted lending commitments and new debt restructurings (excluding officially supported debt and debt service reduction) were almost unchanged. In interpreting spread developments, it should be noted that reported figures may not accurately reflect the income that banks receive because they do not take account of various fees and commissions attached to loans.

Average maturities on new credit commitments to developing countries declined gradually between 1984 and 1986, reflecting a decline in maturities on concerted money commitments; maturities on spontaneous lending commitments remained broadly unchanged (Table A25). In 1987, average maturities increased sharply, but this rise was reversed in the following two years, and in 1989 the average maturity on both spontaneous and concerted lending was eight years and one month, slightly shorter than in 1986. Maturities under rescheduling agreements have lengthened considerably in recent years, from an average of about 7.5 years in 1983 to about 15 years in 1986–89.

Bond Financing

Gross bond issuance by developing countries (excluding offshore centers) amounted to $6.0 billion in 1988, the highest level since 1985, before falling back to $4.3 billion in 1989 (Table A26).18 Borrowers in 1988 and 1989 consisted almost exclusively of Asian and European countries that have not restructured their debt in recent years, and access to international markets remained strictly limited for developing countries in Africa and the Western Hemisphere. Gross issues by Asian borrowers amounted to $2.6 billion in 1988—the bulk of which was accounted for by China, India, and Malaysia—which was broadly in line with that of the previous year. Issuance by European developing countries doubled to $2.0 billion—its highest level this decade—reflecting high gross borrowing by Hungary and Turkey. In 1989, however, issues by Asian borrowers declined significantly, largely on account of reduced borrowing by China.

A notable development in 1988–89 was the return to international bond markets of two developing country borrowers that face debt-servicing problems. In 1988, the Venezuelan Government placed bonds with a total value of about $255 million, in addition to some $500 million issued in the context of a debt exchange at par.19 Mexico, which had issued $2.6 billion in collateralized bonds in February 1988 as part of a debt exchange, returned to the markets in June 1989 through private placement of a $100 million issue by Banco Nacional de Comercio Exterior—the first from a Mexican public entity since 1982.20 In total, Mexico is reported to have raised about $500 million through private placements in 1989.

Recent Financing Packages

During 1988 and early 1989, the pace of bank debt restructurings diminished. In 1988, seven new agreements were signed, only two of which (Brazil and Yugoslavia)21 contained new money, and two agreements modified the terms of previous agreements; this compares with the signing of 11 new agreements and four modifications of terms in 1987 (Table 8).22 Moreover, in the first half of 1989 there was only one further restructuring agreement signed, a debt rescheduling by Nigeria that had been agreed in principle in September 1988, as negotiations for many countries were delayed pending the outcome of discussions with Mexico and the Philippines in the context of the strengthened debt strategy. In addition, two agreements—with Poland and Zaïre—involved the deferment of amortization payments falling due, pending completion of more comprehensive debt-restructuring packages.

In the second half of 1989, agreements were reached in principle with Costa Rica, Mexico, and the Philippines. The Mexico and Philippines packages included both new money and debt and debt service reduction options, while the Costa Rican agreement offered banks alternative debt and debt service reduction facilities, as well as a restructuring of past due interest. The debt and debt service reduction components in these cases are to be financed in part from official sources, including the Fund and the World Bank. In addition, agreement was reached with Jordan on a package including both a rescheduling and new money and a bilateral agreement was reached between Honduras and its two largest bank creditors on a concessional rescheduling. At the end of 1989, negotiations were continuing on restructuring of debt to commercial banks for a number of countries, including Côte d'lvoire, Ecuador, Morocco, Nigeria, Poland, Uruguay, and Venezuela.

Table 8.

Chronology of Bank Debt Restructurings and Bank Financial Packages, 1983–89

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Note: “Restructuring” covers rescheduling and also certain refinancings of member countries.Sources: Restructuring agreements.

Agreement either signed or reached in principle (if signature has not yet taken place); not all signed agreements have become effective.

The restructuring agreement includes new financing.

Agreed in principle or tentative agreement with banks' steering committees.

New financing only, semispontaneous.

A separate club deal for new financing was arranged at the same time.

Total concerted lending commitments in 1988 amounted to $5.7 billion which, while greater than in previous years, remained substantially lower than the levels recorded in 1983–84 (Table A29).23 The bulk of the commitments was accounted for by concerted new money facilities for Brazil ($5.2 billion through a menu of new money bonds and parallel and cofinancing with the World Bank). In 1989, total commitments came down sharply to $2.3 billion (mainly to Mexico and the Philippines), in reflection of the slow pace of negotiations and the emphasis given in a number of packages to providing banks with options to participate through debt and debt service reductions rather than new money.

Specific Agreements

The three financing packages agreed upon with banks in 1989, including officially supported debt and debt service reduction, have each had distinctive features.24 In the case of Mexico, agreement was reached with the steering committee of commercial bank creditors on a multiyear financing package in September 1989 that incorporates a new money facility and two alternative debt exchange options—a discount exchange and a reduced interest par exchange. Banks choosing the new money facility would provide financial support for the period 1989–92 amounting to 25 percent of their base exposure; the bulk of the new loans would bear interest at 1316 over LIBOR and have a maturity of 15 years, including 8 years' grace. The discount exchange involves the exchange of bank claims for 30-year bonds (at 65 percent of face value) carrying market interest rates (spread of 1316 over LIBOR), a full principal guarantee, and an 18-month rolling interest guarantee. The par exchange option consists of an exchange of bank claims for 30-year bonds with the same face value but below-market interest rates (a fixed rate of 6.25 percent), and the same guarantee structure as for the discount bonds. The package also includes waivers for future debt and debt service reduction and allows for the resumption of debt-equity conversions and the recovery by banks of some of the initially scheduled debt servicing should real oil prices exceed a threshold level. On the basis of the response from banks as of mid-January 1990, it appears that 13 percent of foreign bank exposure would form the basis of new money commitments, about 40 percent would be allocated to the discount exchange and 47 percent to the par exchange. Consequently, debt amounting to about $22½ billion would be subject to reduced interest rates, and additional gross claims of about $7 billion would be extinguished. New money commitments would amount to $1.6 billion through the end of 1992.

With regard to the Philippines, agreement was reached with the steering committee of bank creditors in October 1989 on a financing package in which banks were requested either to participate by providing new money or to exit through a debt buy-back. New money would be in securitized form, would bear interest at 1316 over LIBOR and would have a maturity of 15 years, including 8 years' grace. By the end of the year, new money commitments were received from banks amounting to about $612 million, which is to be disbursed in the course of 1990. In January 1990, the Philippines completed a buy-back of $1.3 billion (about 20 percent of outstanding eligible medium- and long-term debt to banks) at a price of 50 cents on the dollar. The package with the banks also included a rescheduling of maturities falling due under the 1985 new money package on the same terms as the 1990 new money, and waivers allowing for additional debt and debt service reduction operations (including the buy-back) subject to a limit of $1.5 billion of official financing.

Costa Rica reached agreement in principle with the steering committee of bank creditors in November 1989 on a restructuring package that includes debt and debt service reduction and a regularization of arrears, but not a new money component. The package specifies (a) a cash repurchase option applied to both principal and past due interest at a price of 16 cents per U.S. dollar of debt; (b) exchange of remaining unpurchased debt for one of two types of bearer bonds: banks tendering at least 60 percent of their debt for cash repurchase may exchange remaining debt for Type A bonds bearing a fixed interest rate of 6.25 percent a year and repayable in 20 years with a 10-year grace period; banks tendering less than 60 percent of their debt may exchange their remaining debt for Type B bonds paying the same rate of interest, but repayable in 25 years with a 15-year grace period. Type A bonds will receive a 12-month interest guarantee, while Type B bonds will not carry such a guarantee; (c) treatment of unrepurchased past-due interest as a separate debt requiring a 20 percent cash downpayment, and repayment of the balance over 15 years at a rate of LIBOR plus 1316 percent a year. Holders of these claims who have tendered at least 60 percent of their debt for the cash repurchase option will receive a 36-month interest guarantee on these claims; (d) implementation of a five-year debt-equity conversion program for the new bearer bonds and interest claims; and (e) a value recovery provision to take effect once Costa Rica's real GDP exceeds by 20 percent its 1989 level.

With regard to other bank agreements in 1989, Nigeria signed an agreement with bank creditors in April to reschedule debt outstanding at the end of 1987 amounting to $5.8 billion. The arrangement incorporated a maturity period of 3 years (no grace period) and no interest charge for interest arrears and charges on letters of credit, and a reduced spread over LIBOR and maturity periods of 15 years (including 3 years' grace) for restructured principal on letters of credit, and of 20 years (3 years' grace) for other debts. In June 1989, Poland reached agreement with the steering committee of bank creditors on a financing package which defer payments on principal obligations of about $200 million falling due in 1989 and 1990. Similarly, Zaïre and its commercial bank creditors agreed in June 1989 on a deferment arrangement for settlement of obligations in arrears and principal falling due in 1989 and early 1990. Under the arrangement, Zaïre is to make monthly payments of $4 million, while the applicable spread was reduced from 200 basis points to 150 basis points over LIBOR. Jordan reached agreement in principle with the steering committee of creditor banks in November 1989 on a package including (1) the restructuring of medium-term loans coming due in January 1989–June 1991 over a 10½-year period; and (2) a new medium-term money facility in the amount of $50 million for three years, which represents the amounts of bank credit commitments outstanding at the time of the restructuring. Honduras reached agreements in August 1989 on a bilateral concessional rescheduling of credits with two of its main bank creditors. Under the terms of the agreements, 100 percent of principal and outstanding interest arrears was rescheduled over a 20-year period, with interest to be paid at a concessional fixed rate. The agreements also included an option for a subsequent cash buy-back and for a value recovery clause.

Aspects of Debt Management

Debt Conversion Schemes

In recent years, debt conversion schemes have been an increasingly important component of debt management. Initially, the emphasis was on debt-equity swaps and on exit bonds. In 1989, the emphasis shifted to more comprehensive schemes—including buy-backs and debt exchanges—supported by official funding aimed at achieving a substantial reduction in the “debt overhang” and thus to promote the debtor country's growth potential and eventually restore its market access.25

Available information indicates that developing country debt with face value of almost $8 billion was extinguished in 1988 through officially recognized voluntary debt conversion schemes (Table 9).26 The value of affected debt was about 70 percent higher than in 1987 and was almost equal to the total debt converted in the period 1984–87. The largest shares of realized debt conversions were accounted for by Chile, followed by Brazil, Mexico, the Philippines, and Argentina. Preliminary data for 1989 suggest that conversions in ongoing programs were reduced to under $6 billion of face value. However, bank agreements with Mexico, the Philippines, and Costa Rica have laid the ground for debt and debt service reduction operations on a substantial scale in the period ahead.

Table 9.

Debt Conversions, 1984–891

(In millions of U.S. dollars)

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Sources: Central Bank of Argentina; Central Bank of Brazil; Central Bank of Chile; Mexico, Ministry of Finance; Central Bank of Philippines; Bank of Jamaica; Central Bank of Venezuela; and Fund staff estimates.

Face value of debt converted under official ongoing schemes. Figures do not include large-scale one-off cash buy-backs and debt exchanges, which are reported in Table A32.

January–June.

Does not include an estimated $6–8 billion related to prepayment at a discount of private sector debt since August 1987 signing of an agreement to restructure FICORCA debt.

January–September.

In view of the limited coverage of available data (in terms of both countries and schemes coveraged), the indicators cited in this section are likely to underestimate the underlying magnitude of conversions. In particular, no account is taken of informal debt conversions, which, are believed to have been significant in a number of debtor countries. At the same time, it should be noted that the net reduction in debtors' foreign liabilities is smaller in view of the counterpart to the debt reduction (e.g., equity holdings by foreigners). If account is taken of offsetting domestic debt issuance for sterilization of the monetary effects, there is a further reduction in the net retirement of total public sector liabilities.

Debt-Equity Conversions

An important share of debt converted under officially sanctioned operations has taken the form of debt-equity swaps in which the debtor agrees to exchange, generally at a discount, bank claims for local currency cash or other financing instruments, provided that these are used to purchase equity holdings or other assets in new and existing entities in the debtor country. Equity acquisitions predominantly take the form of direct purchases into specific firms; in some cases, however, mutual or venture capital funds provide the vehicle for the investments.27 By reducing the initial costs of investments as a consequence of the discount, these operations provide greater incentive for foreign investment while contributing to a reduction in developing countries' external debt. At the same time, it is recognized that the benefits of a debt-equity program, as well as several of the other debt conversion schemes discussed below, could be quickly offset if not accompanied by prudent demand management policies, appropriate prices, and other supply-enhancing measures.

In 1988, new debt-equity conversions were most important in Argentina, Brazil, and Chile.28 The magnitude and concentration of activity in these countries declined in 1989, however, as Argentina and Brazil suspended new operations in response to what was perceived to be substantial pressures on fiscal policy and monetary expansion. Moreover, concerns were expressed about the lack of transparency, the potential transfer to nonresidents of control over domestic resources, and the risks of “round tripping.”29 Finally, there were also some reservations as to whether these operations mobilized additional funds instead of just leading to a reallocation of resources, with investors obtaining equity at “bargain basement prices.” The rate of conversions also declined in Mexico and the Philippines, which had both previously suspended acceptance of new debt-equity swap proposals, also in response to reservations about the macroeconomic implications and on the structure of investment incentives. By contrast, Chile maintained its program, while acting to limit potentially adverse effects through the pursuit of tight financial policies and the maintenance of regulations on, inter alia, sector coverage and transfer rights of equity participation. Moreover, debt equity conversions became significant in Venezuela, particularly after the inauguration of an auction allocation system for conversion rights in the fourth quarter of 1989.

The rate of debt-equity conversion may be expected to increase in the near future. Both the bank agreements with Mexico and Costa Rica contain explicit commitments as to amounts of debt-equity conversion to be undertaken, while the Philippine authorities have also expressed an intention to revive a debt-equity conversion program in the context of the agreement with creditor banks.

Debt Buy-Backs

Cash buy-back operations involve the retirement of debt at a discount through a cash prepayment, thus reducing the present value of the debtor's contractual debt service burden. The efficiency of such operations for the debtor depends on the implicit rate of return of using own or borrowed funds in a buy-back relative to that obtained on alternative uses of the funds—assuming that the latter would be available for uses other than debt reduction.30 On the side of creditors, these operations have tended to be favored by those seeking to lower both medium-term portfolio management costs and new money obligations, at the cost of recognizing a loss on the claim. At the same time, several observers have expressed concern over the moral hazard implications of allowing buy-backs and the diversion of debtor funds away from debt servicing on initial contractual terms.

Like most debt-conversion schemes, buy-backs generally require waivers to a number of loan covenants, since they alter the phasing of payments and, typically, their distribution among creditors. For example, waivers are normally required for prepayment penalty clauses (imposed to limit losses on account of banks' eventual maturity mismatching) and sharing clauses (which ensure that debtors' payments are shared by creditors on a proportional basis).31 Banks have been unwilling to provide open-ended waivers, agreeing instead to temporary waivers in the context of arrangements in which resources for debt reduction may be viewed as incremental to what would have otherwise been available for meeting contractual debt service obligations.

As noted in last year's report, Bolivia conducted the first officially supported buy-back scheme in January 1988. Using resources obtained through voluntary bilateral contributions, it was able to retire claims with face value of $253 million at a cost of $28 million. A further $64 million was converted into fully collateralized bonds, while $16 million was donated to the country. As a result, almost half of the banks' outstanding principal and some related overdue interest claims were extinguished. The authorities are currently investigating the possibility of retiring the remaining indebtedness to commercial banks through a second buy-back, combined with debt-bond conversions.

In 1988, Chile obtained a waiver from its commercial bank creditors allowing it to devote up to $500 million of foreign exchange reserves related to “windfall” earnings from copper exports to buy back debt or to collateralize a debt exchange. In November 1988, the authorities bought back debt with a face value of $299 million at a cost of $168 million—implying a discount of 44 percent, broadly in line with the secondary market level. In a second stage operation in November 1989, a further $140 million was accepted for buy-back at an average discount of about 42 percent.

The Philippines buy-back in January 1990, arranged in connection with the 1989 bank financing package referred to above, was the first debt-reduction operation to be financed in part from earmarked resources obtained from the Fund and the World Bank. The buy-back, which was completed in January 1990, extinguished claims of $1,339 million at a negotiated price of 50 percent, which was close to the secondary market price of bank claims on the Philippines.

Debt Exchanges

Debt exchanges involve the exchange of one type of claim for another that offers modified terms in return for some form of enhancement or reduced obligation to participate in future financing packages. In the 1987 Argentine agreement, banks could exchange at par a limited amount of debt (up to $5 million a bank) for bearer bonds that carried a 4 percent coupon, 25-year maturity, and provided exemptions from the 1987 and future new money facilities. In all, $15 million of debt was exchanged. The 1988 Brazilian package also included exit instruments, in the form of bearer bonds with 6 percent interest and a 25-year term, which exempted holders from new money commitments and which were eligible for debt-equity conversions. Each bank was allowed to acquire up to $15 million, with a cumulative limit of $5 billion. In the event, bonds with an aggregate value of $1.1 billion were issued.

More recent debt exchanges have involved the exchange of claims for another type of asset on the debtor involving collateralization of principal and interest payments. An early example of such an exchange was the 1988 Mexico-Morgan scheme under which Mexico accepted bids from 90 banks for $3.7 billion in claims and exchanged them for $2.6 billion in new bonds whose principal repayment was collateralized by 20-year zero coupon U.S. Treasury bonds. The exchange ratio of about 70 percent was determined in a Dutch auction and implied that the secondary market value of the claim relinquished was about equivalent to the market value of the claims received (valuing interest payments as Mexican risk and the principal as fully secured). Nevertheless, the realized exchange fell short of the Mexican authorities' goal of $10 billion in new instruments. Bank sources cited the insufficiency of the securitization (namely, noncollateralization of the interest stream) and tax and regulatory impediments as contributing to the shortfall.32

As described above, the 1989 restructuring package with Mexico offered banks two alternative collateralized debt exchanges, with collateralization extended to provide partial coverage of interest payments as well as full coverage of principal. The terms of the exchanges were preset by negotiation to be broadly in line with the prevailing market price, although a subsequent decline in interest rates made the par exchange with a fixed interest rate somewhat more favorable than the discount exchange in risk-adjusted present value terms. In the event, banks' participation was about evenly distributed between the two exchanges, with the discount exchange reportedly proving attractive, particularly to Japanese banks, in part for tax reasons that are discussed in Section V. The agreement also included a recapture clause that would allow banks to share in additional export receipts arising from an oil price higher than a specified threshold despite the reduction in contractual claims arising from the debt exchanges.

In the Costa Rica case, the new contractual interest rate on the par bond is the same as for Mexico, but the extent of enhancement of the bond is substantially less. In consequence, the market value of the bonds is estimated to be much lower than for the Mexican bonds and to be broadly in line with the prevailing secondary market price of bank claims on Costa Rica.

Other Debt Conversions

Other types of debt conversion that have attracted interest in the recent past include debt-for-exports, debt-for-nature, debt-for-good-causes, and debt-rediscount cancellation schemes. Debt-for-exports schemes typically involve the exchange, by both original creditors and secondary market purchasers, of claims for local currency that is then used to settle, either partially or fully, payments to exporters in the debtor countries. In general, these transactions have been limited to officially sponsored bilateral operations, usually involving the public sectors in creditor and debtor countries, and repayments of commercial debt by a small number of developing countries. In view primarily of concerns as to possible diversion of export earnings away from “free foreign exchange” and toward tied debt payments, as well as reservations about possible implications for resource allocation, there has been a tendency to attempt to limit the coverage of the operations to what may be regarded as “marginal export products.”

Debt-for-exports operations have been important in Peru and Yugoslavia. In the case of Yugoslavia, debt-for-export transactions are estimated to have reduced Yugoslavia's indebtedness to commercial banks by at least 15 percent in 1989. One element of the broad scheme has involved the retirement of debt using reexports originating through the bilateral arrangements with the U.S.S.R. On the basis of approvals granted by the authorities in 1988, products originating from the U.S.S.R. valued at some $100 million are estimated to have been re-exported in exchange for debt during 1989.

Debt-for-nature swaps usually take the form of an acquisition of developing country debt, at a discount, by conservation organizations; the debt is then converted into local currency instruments to fund conservation programs. During the last two years, such programs have been launched in a number of countries.33 The Bolivian program involved the conversion of $0.6 million of claims; under the Costa Rican program, the Central Bank authorized the conversion of up to $5.4 million of debt; in Ecuador, up to $10 million of debt claims are subject to conversion; in the Philippines, the authorities agreed to redeem up to $2 million of debt.

Debt-for-good-causes operations involve the donation of commercial bank claims to charitable organizations, which are then redeemed for local currency to support charitable work. Recent examples of such operations include reported donations of Sudanese debt to UNICEF by Midland Bank ($0.8 million) in late 1988, and Deutsche Bank ($2.9 million) in 1989. Hambros Bank is reportedly finalizing a third operation for $2.4 million. Similar operations have been undertaken in Bolivia and Zambia, with official sector resources being used to acquire claims on the secondary market and to donate them for charitable work. Debt-for-good-causes conversions generally have been limited to claims on low income developing countries whose debt is subject to a very large discount on the secondary market.34

Debt-rediscount cancellation schemes have operated in both Argentina and Uruguay. Under these schemes, the authorities have accepted discounted foreign debt in exchange for official sector claims on specified domestic entities. Investors then retained these claims as debt liabilities or converted them into equity participation in the local entities. In the specific case of Argentina, creditors converted their claims through an auction system and acquired equity holdings in local companies that previously had received credit from the Central Bank through rediscount operations. Capital repatriation may take place only ten years after the conversion, with the limitation period on the transfer of dividends being specified at four years. In 1988, approval was provided for the retirement of external debt with face value of $488 million against central bank rediscounts amounting to $170 million at the free market exchange rate.

Secondary Market

The application of the broadened menu of options has been facilitated by, and contributed to, the expansion of the secondary market for developing country debt. Initially, the bulk of secondary market transactions was accounted for by swaps aimed at rationalizing individual bank loan portfolios, and purchases of claims for use in officially sanctioned debt-equity conversions and retirement by the corporate sector of own debt at a discount.35 Recently, the preponderance of cash transactions has increased, as banks have adjusted portfolios in anticipation of debt and debt service reduction operations, a process that has been facilitated by the emergence of specialized market makers in problem country debt.36

While no reliable information is available on the size of the market, partial indicators point to a steady growth since the early 1980s, with turnover increasing from less than $5 billion in 1985–86 to an estimated $30–40 billion in 1988. The curtailment of debt-equity conversion programs in a number of debtor countries contributed to a decline in volumes in the first two months of 1989, with annualized turnover estimates some 50 percent below the previous year's level. However, the announcement in March 1989 by U.S. Treasury Secretary Brady of official support for debt and debt service reduction proposals led to a strong recovery in volumes, as market participants positioned themselves in anticipation of bank debt restructuring agreements and the resumption of debt-equity programs.

The structure of the market—particularly, its low (though growing) liquidity and lack of standardized products—has tended to be reflected in volatile price behavior, and the average indicator, based on the weighted average of discounts for benchmark claims on the 15 heavily indebted countries, continued to fluctuate widely in 1988 and 1989.37 During 1988, the average discount declined to 60.0 percent (i.e., a price level of 40.0 cents per dollar of claim) at year end, some 8.5 percentage points larger than a year earlier (Chart 8)—thereby reinforcing developments in 1987 when announcements of increased loss provisions by major U.S. and U.K. banks contributed to a sharp widening in secondary market discounts for developing country claims. After deepening further to 66.6 percent in the first two months of 1989, the average discount narrowed by almost 5 percentage points in the aftermath of the announcement of the Brady proposals; it widened, however, in the second half of 1989 as negotiations on debt and debt service reduction proved protracted, while some countries experienced severe economic difficulties. The average discount reached an estimated level of 68 percent at year end.

Chart 8.
Chart 8.

Secondary Market Prices for Developing Country Loans1

(In percent of face value)

Source: Salomon Brothers.1 Weighted average for 15 heavily indebted countries.

Movements in the average market discount have tended to conceal significant variations in the changes in discounts on individual country claims. Thus, over the 1988–89 period as a whole, market discount indicators remained broadly constant for claims on Bolivia (89 percent), Chile (41 percent), and Yugoslavia (52 percent). In the case of the Philippines, the discount both rose and fell sharply over the course of the first half of 1989 but then stayed around 50 percent in the second half of the year—the agreed price for the 1990 buy-back—much the same level as in 1988. By contrast, during 1988 and 1989 sharp increases in discounts were sustained for claims on Argentina (21 percentage points to 86 percent), Brazil (24 percentage points to 77 percent), Ecuador (23 percentage points to 85 percent), and Venezuela (23 percentage points to 65 percent). Lower increases were registered for Mexico (12 percentage points to 62 percent) and Morocco (11 percentage points to 58 percent). In general, the secondary market prices for the debt of countries experiencing favorable economic and external debt-servicing performance, maintaining debt-conversion possibilities in the form of debt-equity and buy-back schemes, and whose debts have not been subject to increased specific provisioning requirements, have maintained their levels better than the average for countries whose debt trades at a discount.

Portfolio Management

The broadening of the menu of options, and the associated expansion of opportunities for transactions on the secondary market, have provided banks with increased flexibility in managing their developing country loan portfolio. Accordingly, many international banks have strongly pressed for the inclusion of conversion facilities in financing agreements—particularly debt-equity swaps and, to a lesser extent, debt-export conversions. Banks have viewed such instruments as providing an appropriate means of allowing debtors to capture some of the secondary market discount and, at the same time, allowing creditors opportunities to change the nature of their contractual claims on debtors, to enlarge the avenues for disposing of claims, and to expand fee-related income activities with entities seeking to obtain local purchasing power at what is effectively a discount.

Several banks have set up trading units and subsidiaries to undertake swaps on the secondary market and, in some cases, to dispose of claims. These operations have been driven by the desire to consolidate exposure on countries deemed to be of longer-term strategic interest (e.g., some U.S. banks swapping into Latin America, some German banks swapping into Eastern Europe, and some French banks swapping into Africa), to diversify loan exposure on a particular country through exchanges of instruments, to take advantage of differentiated tax treatment of different types of claims, and to position banks to undertake conversion operations for clients and on own-accounts.38 In addition, a number of banks have sought to take advantage of perceived profitable opportunities—resulting from a different evaluation of the expected returns on country claims compared to those implicit in the price ratios—through arbitrage-induced transactions. Some smaller international banks have tended to use the secondary market to dispose of claims, thereby enhancing market perception of their financial strength and hence their credit rating, eliminating some of the back-office costs associated with managing loan portfolios and reducing their future concerted new money obligations. The latter, however, has raised a number of issues regarding intra-creditor burden sharing. In the 1988 Brazilian restructuring package, for example, several banks initially resisted the revision of the new money base from 1982 to 1987—which had been proposed in response to changes in the distribution of claims among banks, and between the banks and nonbank sectors—as it implied an increase in their contribution to the new money package. This exacerbated divisions among banks resulting from geographical, exposure, and lending strategy differences. Future burden-sharing discussions on new money facilities may become more difficult as the wider application of a broadened menu results in the exit of more banks, thereby shrinking the participation base.

In addition to sales and swaps on the secondary market, some banks have transferred claims to third parties abroad, allowing the banks to rearrange their balance sheets and, in some cases, benefit from more advantageous tax treatment while maintaining a contingent claim on future payments affected by debtors. Examples include the transfer of some assets by Japanese banks to a factoring company in the Cayman Islands. Such operations allowed the banks to reduce their balance sheet problem debt exposure, to establish losses for tax purposes, and to retain a contingent claim on future debt servicing. A similar transaction was undertaken, among others, by a French bank (Credit Commercial de France), which rearranged its balance sheet by transferring its developing country claims to a third party located in Jersey.

Trends in Bank Exposure and Balance Sheet Structure

The portfolio management techniques described above together with extremely limited amounts of new lending have allowed banks in the main creditor countries to reduce their problem country exposure sharply in recent years. Combined with a gradual buildup in bank capital since the onset of the debt crisis, this process has resulted in a substantial strengthening of commercial bank balance sheets from this perspective.

In the United States, banks' reported exposure to developing countries was reduced from $145 billion at the end of 1983 to $85 billion at the end of the third quarter of 1989, mainly through secondary market sales, participation in debt equity and balance sheet write-offs (Table 10 and Chart 9). Initially, the regional banks with low levels of exposure were the most aggressive in “cleaning” their balance sheets, but more recently the major money center banks have also made substantial progress in reducing exposure.39 Over the same period, U.S. banks have taken action to boost capital from $79 billion to $145 billion, so that the ratio of capital to external claims on developing countries rose from 55 percent in 1983 to 171 percent at the end of the third quarter of 1989.40

Table 10.

U.S. Banks' Developing Country Claims Relative to Capital, 1980–Third Quarter 1989

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Sources: Federal Financial Institutions Examination Council, Country Exposure Lending Survey; and International Monetary Fund, International Financial Statistics (IFS).

The data presented in this table are based on exposure; that is, they are adjusted for guarantees and other risk transfers.

Emerging Stock Markets

Equity markets in a number of developing countries have expanded substantially in recent years. According to data of the International Finance Corporation (IFC), during the five-year period ended December 1988, market capitalization (i.e., the market value of shares) for a group of 30 of these “emerging” markets41 rose by nearly 500 percent to $378 billion, while value traded increased by a factor of 16 in U.S. dollar terms (Table 11). As a result, the share of emerging markets' capitalization in the global total rose from 2½ percent at the end of 1983 to 4 percent at the end of 1988. Over the same period, the number of companies listed in these stock exchanges increased by 63 percent to nearly 11,000.

This rapid growth has been in part a reflection of the need of newly industrializing economies to mobilize substantial amounts of capital to push forward industrialization. It is thus not entirely surprising that the strongest expansion has taken place in the emerging stock markets of Taiwan Province of China and Korea (which jointly accounted for nearly 70 percent of the increase in market capitalization of emerging markets during 1984–88), followed by Mexico, Brazil, and India (which together accounted for about 18 percent of the increase in market capitalization over the same period).

Recent growth in emerging stock markets, has been accentuated by a number of factors that have stimulated a shift in emphasis from bank debt to equity financing. First, in a number of developing countries, financial sector reforms, analogous to those that have swept the industrial countries' capital markets, have sought to remove biases favoring debt financing, such as those associated with interest rate subsidies, tax deductibility of interest earnings, and negative real interest rates. Reforms have also sought to strengthen regulatory and supervisory systems, including those necessary for the effective functioning of stock exchanges. In some cases, these reforms also have included significant reductions in restrictions on foreign equity and portfolio investment.

Chart 9.
Chart 9.

Selected Balance Sheet Data for U.S. Banks, 1978–Third Quarter 1989

(In percent)

Source: Federal Institutions Examination Council, Country Exposure Lending Survey.1 Twelve-month growth rates.2 Excluding offshore centers.

Second, the large indebtedness of many developing countries has underscored the necessity to seek alternative routes to mobilize domestic as well as foreign savings for investment, and this has turned attention toward securities markets. In this connection, debt-to-equity conversion programs, often developed in conjunction with debt restructuring agreements between debtor countries and creditor banks, and privatization programs, often associated with broader structural reforms, have fostered the development of equity markets.

Third, the trend toward the globalization of investment portfolios has begun to have an impact on emerging securities markets. A number of “blue chip” corporations from developing countries have outgrown their domestic markets and have been able to raise capital in developed securities markets. Moreover, investors in industrial countries, including large institutional investors, have shown increasing interest in investing in emerging markets attracted by high potential returns and opportunities for portfolio diversification. These flows have been encouraged by the setting-up of a growing number of country-specific and multicountry funds, in particular by the IFC, and by the increased flow of reliable information on performance and other characteristics of these markets.

And fourth, emerging markets have been able to acquire fairly quickly and at low cost sophisticated technology relevant to stock exchanges, particularly in the areas of financial-instrument innovation and computer automation of communication and trading systems.

Relative Performance

According to price and total return indices in U.S. dollar terms prepared by the IFC, emerging markets have often exhibited significantly greater volatility than developed stock markets but have, as a group, outperformed developed markets in terms of cumulative increases in prices and of total returns both during recent years and over longer periods.42 However, cumulative returns and their volatility have varied considerably between individual emerging markets.

IFC data on cumulative returns in U.S. dollar terms show that five out of nine emerging markets had a better cumulative performance than the S&P 500 over the 13-year period ended December 1988, while four out of the nine markets outperformed the Morgan-Stanley Capital International World Index (MS-CI)—a composite index for the developed markets of North America, Europe, Australia, and the Far East (Table A36 and Chart 10). The performance across regions appears quite mixed, however, when one compares the subperiod from the end of 1975 to the end of 1980 with the subperiod from the end of 1980 to the end of 1988. During the former, strong performers were more or less evenly spread across emerging markets in Latin America and Asia. During the latter, cumulative returns were disappointing in Latin American markets—reflecting the slump in corporate profits, the substantial adjustment in the real exchange rates, and the weakening of national economies associated with the debt crisis—although they continued to increase in Asian markets, particularly Korea. Since the stock market break of October 1987, emerging markets as a group, and by regions, have outperformed by a large margin the S&P 500 and the MS-CI World Index. Performance in Brazil, Mexico, Korea, and Taiwan Province of China has been particularly robust.

Table 11.

Indicators of Size for Emerging and Developed Stock Markets

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Source: International Finance Corporation, Emerging Stock Markets Factbook, 1989.

As regards volatility, 8 out of 17 emerging stock markets displayed greater volatility than the S&P 500 during the 60-month period ended March 1989. Indices for Argentina, Brazil, Mexico, and Taiwan Province of China exhibited the largest variability, with standard deviations ranging from 16 percentage points around the mean for Taiwan Province of China to 26 percentage points around the mean for Argentina. The nine emerging markets with standard deviations below that of the S&P 500 included Chile, Korea, India, and Thailand.

Chart 10.
Chart 10.

IFC Composite and Regional Total Return Indices

(In U.S. dollar terms; December 1984 = 100)

Note: IFC Composite: Argentina, Brazil, Chile, Colombia, Greece, India, Jordan, Korea, Mexico, Malaysia, Nigeria, Pakistan, Philippines, Portugal, Taiwan Province of China, Thailand, Turkey, Venezuela, and Zimbabwe. Latin America: Argentina, Brazil, Chile, and Mexico. Asia: Korea, Malaysia, Taiwan Province of China, and Thailand.Source: International Finance Corporation, Emerging Markets Data Base.

Structural and Institutional Aspects

Compared with developed markets, the majority of emerging stock markets exhibit a high degree of market concentration. Concentration ratios, as measured by the share of market capitalization represented by the ten largest stocks, are in the 20–30 percent range in five emerging markets (Mexico, Brazil, India, Pakistan, and Korea), but the rest of the emerging markets are above 40 percent, with concentration ratios in Colombia, Venezuela, and Jordan exceeding 60 percent. These figures compare with ratios of about 14 percent in the United States, 23 percent in the United Kingdom, and 25 percent in Japan.

The degree of openness to foreign investors varies considerably across emerging stock markets, although a general trend toward gradual liberalization is under way. According to the IFC, at the end of 1988, only Jordan, Malaysia, and Portugal offered foreign investors free entry and unrestricted repatriation of capital and income from shares. A few other emerging markets (e.g., Argentina, Chile, Venezuela, Indonesia, and Thailand) were classified by the IFC as open, although they required some registration procedures and placed some restrictions on the repatriation of capital and income. At least half of the emerging markets tracked by the IFC, including, for instance, Taiwan Province of China, Korea, and Brazil, were classified as being closed to nonresident investors; however, some closed markets (e.g., Mexico, Philippines, and Zimbabwe) allow foreigners to invest in certain classes of stocks, specially designed for nonresident investors. Others (e.g., Brazil, India, Taiwan Province of China, Korea, and Turkey) permit foreign portfolio investment through special, country-specific or multicountry, funds. Such funds are listed in major stock exchanges of developed countries, have been largely established in the past four years, and in many cases have been pioneered by the IFC. They have grown rapidly in number and size, with total market capitalization of a group of 31 funds tracked by the IFC reaching $5 billion at the end of March 1989. Country-specific funds exist for Brazil, Chile, India, Korea, Malaysia, Mexico, Portugal, Taiwan Province of China, and Thailand, among others.

Withholding taxes in the majority of countries with emerging stock markets are roughly in line with the international average. In Chile, Greece, and Malaysia, a relatively heavy withholding tax on dividends is compensated by the absence of corporate profit tax on distributed earnings; moreover, in Chile there is no withholding tax on dividends if reinvested. Taxation of capital gains is relatively high in Argentina, Chile, and India, although, in Chile the capital gains tax applies only to gains above inflation.

Standards of disclosure, market information, and investor protection also vary across emerging markets. All of the emerging markets tracked by the IFC require financial disclosure of publicly traded companies, in the form of consolidated audited annual statements. The majority of emerging markets also require quarterly or semiannual statements. Although the quality of such disclosures would not generally satisfy the standards of the United States, it is often comparable to standards in Europe and Japan.

Modernization and reform of supervisory bodies, securities legislation, and other regulatory structures are clearly needed in a number of emerging markets to enhance efficiency (through increased competition) while improving investor protection and promoting market stability. Even in emerging markets where securities legislation and supervisory bodies are adequate, there are often problems of weak enforcement, especially with regard to investor protection laws and sanctions against unfair trading. Enforcement problems are often related to less than adequate corporate accounting methods and reporting practices.

16

Recent changes to the accounting, regulatory, and tax treatment of sovereign lending and debt restructuring are described in Section V.

17

These estimates are based on exchange rate adjusted data compiled in the context of the Fund's international banking statistics (IBS) exercise. The estimates are based on changes in stock data and therefore incorporate both lending flows and stock adjustment factors. The latter include write-offs, de facto capitalization of interest arrears, exercises of official guarantees, sale of debt to nonbank sources, and other debt conversions. As some of these factors do not necessarily translate into a change in debtors' recorded liabilities, changes in stock-derived data do not correspond exactly to changes in countries' outstanding debt to private creditors. OECD data on credit commitments are presented in Table A22.

18

Estimates exclude the issue of collateralized bonds of $2.6 billion related to the Mexican debt exchange concluded in February 1988.

19

Venezuela offered securities of $500 million in exchange for old debt with a face value of $400 million and $100 million in new money. The bonds carried a spread of 1⅛ percent over LIBOR compared with a spread of ⅞ of 1 percent for the old debt.

20

“Mexico's Eurobond Comeback,” International Financing Review (London), No. 779 (June 10, 1989). The bonds carried a five-year maturity, a coupon of 10.25 percent, and an issue price of 88.5.

21

These packages were described in detail in International Monetary Fund, International Capital Markets: Developments and Prospects, 1989, World Economic and Financial Surveys (Washington, April 1989).

22

Details on the terms and conditions of banks' restructuring packages for developing countries over the period 1987–89 are presented in Table A27. Amounts of debt restructured are summarized in Table A28.

23

Data on outstanding concerted short-term facilities are presented in Table A30. In Table A31, further information is provided regarding financing instruments and options in new money packages, and restructurings for selected developing countries during 1983.

24

Further information on debt and debt service reduction options in bank financial packages is provided in Table A32.

25

It has been argued that a “debt overhang” impedes investment and growth owing to investor expectations of high future marginal tax rates on future earnings. See the discussion in International Monetary Fund, World Economic Outlook (1989) and in Jacob A. Frenkel, Michael P. Dooley, and Peter Wickham, Analytical Issues in Debt (Washington: International Monetary Fund, 1989).

26

Excluding buy-backs and bond exchanges, which are treated below. Also excluded are unofficial conversions that took place as a result of prepaying, at a discount, previously restructured debt covered by the Mexican Foreign Exchange Risk Coverage Trust Fund (FICORCA) scheme. The FICORCA scheme provided forward exchange rate cover for private sector debtors rescheduling their unguaranteed obligations to foreign commercial banks. Between August 1987 and February 1988 debtors were permitted to reverse the contracts and retire their debts to foreign creditors through purchases on the secondary market; more than $5 billion in private sector debt to commercial banks was retired at reported discounts of 25 to 33 percent as a result of such operations.

27

Detailed analysis of the structure of debt equity conversions is contained in S. Rubin, Guide to Debt Equity Swaps, Economist Special Report No. 1104 (September 1987).

28

Salient details of these and other schemes are summarized in Table A33.

29

The risk of “round tripping” arises if after a series of transactions (such as a debt purchase on the secondary market, followed by a swap for equity and then a resale), foreign exchange can be converted into local currency at a higher effective exchange rate than that available for direct conversion of local currency into foreign exchange.

30

Further analysis is contained in Ishac Diwan and Stijn Claessens, “An Analysis of Debt-Reduction Schemes Initiated by Debtor Countries” Working Papers No. 153 (Washington: World Bank, March 1989), and in Jacob A. Frenkel, Michael P. Dooley, and Peter Wickham, eds., Analytical Issues in Debt (Washington: International Monetary Fund, 1989).

31

In the case of debt exchanges involving securitization (see below), waivers are generally also needed for negative pledge clauses that commit the debtor not to agree to a lien on any present or future asset or revenue as security for new debt without offering to share that security with existing creditors.

32

The scheme is discussed in detail in last year's report.

33

Additional information is contained in “Debt-for-Nature Swaps: A New Means of Funding Conservation in Developing Nations,” International Environment Reporter (May 11, 1988).

34

In November 1987, the U.S. Treasury issued Revenue Ruling 87–124 providing lenders a full cost deduction for donation of developing-country debt to fund charitable organizations operating in debtor nations.

35

Issues in banks' portfolio management strategy are discussed below.

36

Market makers include Citibank, Libra Bank, J.P. Morgan, and Nederlandsche Middenstandsbank.

37

Published price indicators for bank claims tend to reflect available information on the latest transactions, supplemented, in some cases, by judgmental considerations.

38

Including operations to expand foreign banks' local activities in debtor countries—for example, Commerzbank's acquisition of a 10 percent participation in a local Brazilian bank, and First National Bank of Chicago's stake in a Sāo Paulo finance company.

39

Citibank, for example, reduced its medium- and long-term problem country claims from $11.7 billion at the end of 1986 to $8.6 billion at the end of 1989, despite participating in a number of new money packages.

40

See Tables A34 and A35 for information on developing country claims of British, German, and U.S. banks.

41

The concept of “emerging stock markets” is defined in relative terms: it applies to markets that are not yet fully developed. According to the IFC classification, developed stock markets include not only those of industrial countries but also well-established markets in certain newly industrializing economies, such as Singapore and Hong Kong; countries with emerging markets are mainly developing countries, but also include Greece and Portugal, which are now classified as industrial countries.

42

The IFC calculates two types of composite, emerging market indices, a Price Index and a Total Return Index, both in U.S. dollar terms. The indices are weighted by market capitalization of component stocks, a method comparable to that of the Standard and Poor's 500 (S&P 500), and include over 400 actively traded stocks from 19 developing countries. The Price Index is based on changes in end-of-month transaction prices, adjusted for changes in capitalization that affect price per share, such as stock splits. The Total Return Index includes the price variation adjusted for capitalization and adds cash dividends received (posted at ex-dividend dates), and cash dividends implicit in rights issues made at issue prices below prevailing market prices.

Within Same Series

Other IMF Content

Other Publishers Content

Cover World Economic and Financial Surveys
World Economic and Financial Surveys
International Capital Markets 1990
Author: International Monetary Fund
ISBN:
9781451941883
ISSN:
0258-7440
Publication Date:
01 Jan 1990
Publisher:
International Monetary Fund
DOI:
https://doi.org/10.5089/9781451941883.083
Pages:
122
  • View in gallery

    Bond Issues and Long-Term Commitments of Credits and Facilities to Capital Importing Developing Countries, 1981–89

    (In billions of U.S. dollars)

  • View in gallery

    Terms of International Bank Lending Commitments, 1977–89

  • View in gallery

    Secondary Market Prices for Developing Country Loans1

    (In percent of face value)

  • View in gallery

    Selected Balance Sheet Data for U.S. Banks, 1978–Third Quarter 1989

    (In percent)

  • View in gallery

    IFC Composite and Regional Total Return Indices

    (In U.S. dollar terms; December 1984 = 100)

Bond Issues and Long-Term Commitments of Credits and Facilities to Capital Importing Developing Countries, 1981–89

(In billions of U.S. dollars)

Terms of International Bank Lending Commitments, 1977–89

Secondary Market Prices for Developing Country Loans1

(In percent of face value)

Selected Balance Sheet Data for U.S. Banks, 1978–Third Quarter 1989

(In percent)

IFC Composite and Regional Total Return Indices

(In U.S. dollar terms; December 1984 = 100)