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El-Erian, M.A. (1991), “The Restoration of Latin America’s Access to Voluntary Capital Market Financing--Developments and Prospects”, IMF Working Paper, WP/91/74, International Monetary Fund, Washington, DC.
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The author is grateful for comments made by Eduard Brau, Ajai Chopra, John Clark, Eliot Kalter, Thomas Leddy, Alessandro Leipold, Claudio Loser, Liliana Rojas-Suarez and Philippe Szymczak. Can Demir assisted in the compilation and presentation of the data. Responsibility for remaining errors rests with the author.
Given the coverage of the paper, it does not discuss in any detail the formulation and implementation of Mexico’s adjustment policies during this period. It must be stressed, however, that appropriate debt restructuring will only have a lasting beneficial impact on the economy if it is accompanied by the sustained implementation of sound economic and financial policies.
Details on commercial bank and Paris Club debt restructurings are contained in the International Monetary Fund’s annual reviews of international capital markets and multilateral official debt reschedulings, respectively.
The current account deficit had averaged US$2.1 billion in the 1970–77 period, equivalent to 3.0 percent of GDP. (Based on data reported in International Monetary Fund (1985)).
After growing by US$9 billion during 1981 to US$28 billion, short-term claims on Mexico of BIS reporting banks remained broadly unchanged in 1982.
Estimates based on data contained in Federal Financial Institutions Examination Council (1985).
The role of the Fund in the debt strategy is discussed in the institution’s annual reports, and in Coats (1989).
The new money facility carried spreads of 2 1/8 - 2 1/4 percentage points over LIBOR while the spreads on the rescheduled debt amounted to 1 3/4 - 1 7/8 percentage points.
The rescheduling of Mexican private sector debt is not addressed in this paper. Information on the implementation of the FICORCA mechanism (“Fideicomiso para la Cobertura Cambiaria”) that was used may be found in the Bank of Mexico’s annual reports and Vazquez Pando (1988).
These dates correspond to the finalization of agreements rather than the initial agreements with the steering committee of bank creditors.
The 1984 new money facility carried better terms than that of 1983, including a 10 year maturity, 5 1/2 years grace period, and spreads of 1 1/8 - 1 1/2 percentage points over LIBOR.
The modalities of the program were set out in Comision Nacional de Inversiones Extranjeras (1986).
In its 1986 Annual Report, the Bank of Mexico warned that “This scheme can have inflationary effects in that it has recourse to the issuance of currency to finance the repurchase of foreign debt. To avoid these effects it is necessary for the Government to finance its reacquisition of its debt through the placement of securities [which has] the disadvantage of exerting upward pressure on the internal cost of credit and displacing private users of capital.” Some of the costs and benefits of debt-equity swaps in general are discussed in United Nations Center on Transnational Corporations (1990).
After declining to US$1.6 billion in 1982, Mexican international bond issues averaged only US$72 million in the next five years, with three of these years characterized by no new issuance activities.
Agreement on the “critical mass” for the new money facility was reached in late 1986.
Disbursements from the facility included US$545 million from the United States, US$400 million from twelve European countries and US$155 million from Argentina, Brazil, Colombia and Uruguay.
A fuller exposition of the debt overhang concept is contained in Dooley et al. (1990). This approach can be contrasted with the comparative country analyses, based on the traditional external saving constraint model.
The linkages between domestic and foreign indicators of country risk are discussed in Khor and Rojas-Suarez (1991).
In the presence of imperfect information, borrowers may be denied access to credit even if they are willing to pay more than the market interest rate. This reflects essentially the difficulties faced by lenders in adequately pricing the riskiness of loans, taking also into account that this price may affect the subsequent behavior of the borrower and/or attract more risky borrowers (i.e., moral hazard and adverse selection risks). A discussion of these issues is contained in Stiglitz and Weiss (1981).
In the case of U.S. banks, for example, the ratio of capital to external claims on developing countries increased from 49 percent at end-1982 to 119 percent at end 1987.
The 1987 new money package, for example, was delayed substantially by reluctance on the part of U.S. regional banks to participate.
For example, the IFS reported stock of Mexican residents’ deposits in U.S. banks increased from US$7.2 billion at end-1981 to US$14.5 billion at end-1986 (IMF (1988)).
The sharing clause commits creditors party to the agreement to share on a proportional basis any payments received from the debtor. The negative pledge clause commits the debtor not to create for new debt a lien on any present or future assets or revenues without offering to share that security with existing creditors on an equal basis.
In November 1987, Bolivia finalized waivers from its commercial bank creditors to buy back its debt at a discount. During the first quarter of 1988, banks tendered about half of the outstanding principal claims, the bulk of which were bought back at a discount of 89 percent. The buyback was financed by official grants to Bolivia administered and disbursed through a “voluntary contribution account” held at the IMF.
See remarks by Secretary Brady to the Brookings Institution and the Bretton Woods Committee Conference on Third World Debt, reproduced in Department of Treasury (1989). The move on commercial indebtedness was preceded by adaptations in Paris Club rescheduling practices for low-income countries (known as the “Toronto Initiative”) involving, inter alia, debt and debt service reduction options for maturities falling due.
As summarized in D. Mulford’s 1990 statement to the House of Representatives’ Subcommittee on International Development, Finance, Trade, and Monetary Policy, House Committee on Banking, Finance and Urban Affairs. See also Mulford (1989). A discussion of the background to the initiative is contained in Vernon, Spar and Tobin (1991).
The main elements of the 1989–92 program, supported by a 3-year Fund arrangement under the Extended Fund Facility and World Bank financing, are described in Kalter and Khor (1990).
US$700 million of claims under Facilities 2 and 3 were not committed to any option.
Swap rights not exercised under the program may be eventually converted back at par into new debt instruments carrying no enhancements.
As noted earlier, the reduction in contractual claims required Mexico to provide partial collateralization (present value of US$7.1 billion) for the DDSR bonds. This was associated with the acquisition of a “contingent foreign asset” (in the form of the zero coupon bonds and cash balances at the Federal Reserve Bank of New York) that may be used in meeting final interest and principal payments on the bonds, provided Mexico remains current until then.
A comprehensive discussion of the distribution of the benefits of the package between Mexico and its commercial bank creditors is contained in van Wijnbergen (1990).
This factor has been reflected in secondary market price developments since the issuance of the bonds, with the par bonds appreciating at a faster rate than the discount bonds.
These calculations do not take into account profit and dividend transfers associated with the new participation obtained through debt-equity swaps.
The derivation of the Mexican price is based, inter alia, on adjusting (or “stripping”) the reported discount and par bond market prices for the value of the principal and interest collaterals, as well as the notional value of the value recovery feature.
If Chile and Venezuela are excluded from the denominator on the basis that they have also conducted appropriate restructuring operations, the relative increase in the Mexican price is more pronounced.
While the focus of this section is on bond financing, it should be noted that the TELMEX privatization equity offering of over US$2 billion in May 1991 is reported to have constituted the sixth largest placement of shares in the world (nominal values) and the largest for any Latin American country. Vitro, the private glass manufacturer, raised a total of US$73 million. This issue was oversubscribed despite having been increased from the initial US$50 million offering.
An overview discussion of the restoration of Latin America’s access to voluntary capital market financing is contained in El-Erian (1991).
Excludes the DDSR and new money bonds issued in the context of the financing package discussed above.
Increased interest among international investors in Mexican instruments led to the country receiving its first credit rating in December 1990. The ceiling rating for sovereign Mexican debt was set by Moody’s at Ba2--just below investment grade. The DDSR bonds were given a rating of Ba3 reflecting Moody’s perceptions of higher restructuring risks resulting from the registered nature of the bonds, the high proportion held by banks, links to past rescheduling/new money packages and the fact that they account for a large portion of Mexico’s debt to private creditors. (See the 1991 IMF report on recent developments in international capital markets.)
Using, as the basis of comparison, benchmark issues by the governments of the industrial country capital markets accessed by Mexican borrowers.
A similar temporary rise was recorded in the second quarter of the year reflecting, inter alia, initial market reaction to the announcement of German unification. Additional information on general market conditions is contained in the 1991 IMF report on recent developments in international capital markets.
The February issue by the Mexican Government was marketed at an estimated spread of some 200 basis points over comparable German Government bonds.
It may be noted that Mexico’s recent return to voluntary financing is not an unprecedented phenomenon. After defaulting in the early part of the 20th century, Mexico’s entire debt was renegotiated in 1942–46, including through a reduction in contractual principal. By 1960, Mexico had redeemed the affected obligations (See Green (1976)). This was followed by a restoration of access to voluntary international markets leading the New York Times to observe: “Mexico is closing a checkered page in financial history, a story of default and rebirth that goes to the misty era of international promise that preceded World War I… The 46 years between the defaulting of the external bonds in 1914 and the granting of the [new voluntary US$100 million] loan will go down as marking the financial coming-of-age of the Latin republic… With most of the old bonds sucked out of the market by the redemption last week, most of this lingering public evidence of Mexico’s long struggle to live down the old debt default has been wiped out for good” (New York Times of July 2, 1960 quoted in Dornbusch (1988)).
Within the level of allowable CEs, consideration may also be given to mechanisms for reducing the costs of providing a unit of collateralization. For example, this could involve evaluating the scope for pooling arrangements which, in turn, depends on the expected correlation among individual default risks.
The volatility displayed in Chart 10 is measured in terms of the standard deviations over the preceding two years for U.S. dollar-denominated oil prices and interest rates. This measure was used in the general risk management discussion contained in Mathieson, Folkerts-Landau, Lane and Zaidi (1989). Chart 11 displays changes in ex-post measures of real international interest rates.
Specifically, the correlation coefficient for changes in monthly U.S. dollar-denominated international oil prices and LIBOR interest rates amounts to 0.02; it falls to minus 0.2 when account is taken of the average lag in LIBOR interest rate adjustments.
The share of oil receipts in total exports (including in-bond transactions) has declined from an average of over 70 percent in 1980–82 to an estimated 30 percent in 1988–90.
For example, computed on the basis of 1990 oil exports, a 10 percent decline in oil prices would be associated with a US$1 billion loss in export receipts on an annual basis. On the same basis, a 1 percentage point rise in LIBOR would involve incremental interest obligations of some US$0.7 billion.
Moffett and Truell (1991). At the same time, the authorities have set up a contingency fund in which the windfall oil and privatization receipts have been deposited.
Several of these instruments involve the borrower making future payments under certain states of the world (e.g, in the case of a swap where the borrower agrees with its counterparty to exchange a string of certain types of payments obligations for other types of payments obligations).