World Bank Document

cial nature of short-term debt and its importance Despite the progress made in tackling debtfor
maintaining the debtor's foreign trade. More servicing difficulties, problems remain. Banks and
recently, banks have been handling short-term other creditors have, for instance, sometimes
credits separately or creating short-term credit reduced trade financing when a developing counfacilities.
Bankers have also realized that high try has run into difficulty. They have insisted on
spreads and large fees may be self-defeating. In guarantees and have preferred sovereign borrow-
1983, when they signed major rescheduling agree- ers. They have also been reluctant to lend for fear
ments with (among others) Brazil, Chile, Ecuador, that foreign exchange will be reserved for servicing
Mexico, Uruguay, and Yugoslavia, their interest long-term public debt and that short-term comspreads
on rescheduled loans ranged from one mercial credits will be rescheduled into long-term
and seven-eighths to two and a half percentage claims. The decline in commercial credit has therepoints.
However, during the second half of 1984 fore harmed borrowers and inhibited developing
spreads on rescheduled loans under agreements in countries' ability to secure needed imports.
principle with Argentina, Mexico, and Venezuela In summary, new lending by banks is an essenwere
reduced to a range of seven-eighths to one tial part of a financing package designed to supand
one-quarter percentage points. Bankers have port policy reforms for structural adjustment by
reduced or eliminated their fees and sometimes developing countries. On a case by case basis, condropped
the expensive pricing option of using the sideration needs to be given to multiyear debt
U.S. prime rate. Lenders are also being given the restructurings to smooth out debt service streams
option of shifting the denomination of some of for those countries that are implementing structheir
dollar loans to their home currencies, which tural adjustment programs.
could reduce some interest costs for debtor countries.
Access to securities markets
Perhaps the most significant development in
debt reschedulings is the movement toward multi- At the same time as banks are reappraising their
year agreements for some countries that have relationship with developing countries a signifimade
significant progress in adjusting their econo- cant structural change is taking place. The securimies.
A bunching of loan maturities poses an ties markets-and the institutions that operate in
obstacle to the restoration of a normal market rela- them-have increased in importance. A number of
tionship between a rescheduling country and its new instruments have been developed-such as
creditors. The Mexican agreement covers public the note issuance facility (see Box 8.7)-which
sector maturities through 1990 and stretches out blend some of the features of bank loans and
payments over fourteen years. The Venezuelan bonds. These innovations increase the marketabilagreement
covers public sector maturities through ity and hence the liquidity of international assets.
1988 and spreads payments over twelve and a half From the banks' standpoint such innovations have
years. In both these schemes, a combination of served to reduce some of the risks associated with
long repayment periods and shorter grace periods more traditional lending. Those banks that wish to
smooths out principal payments. Both agreements maintain a significant presence in international
provide for the monitoring of the debtor's eco- lending are switching the focus of their operations
nomic performance; banks wanted to be assured of toward these new instrumentalities. A trend
the strong commitment of rescheduling countries toward the securitization of international lending
to policy adjustment and reform. In the cases of may be under way, which could have significant
Mexico and Venezuela, the banks will receive the implications for the nature of private lending to
semiannual reports on consultations between developing countries in the future.
these countries' authorities and the International Despite the development of hybrid instruments,
Monetary Fund.
the traditional international bond markets have
The first-tier banks have therefore adopted a flourished in recent years. International bond marpragmatic
approach to the debt-servicing problems kets have two components: the Eurobond and the
of major debtors. The second-tier banks, however, foreign bond markets. Eurobonds are underwith
smaller exposures to the big debtors, have written by an international group of banks and are
been less willing to join in debt rescheduling issued in several different national markets simularrangements
because there was a strong incentive taneously; they are not subject to formal controls.
for an individual bank to withdraw from lending to Foreign bond markets are simply domestic bond
countries in difficulty.
markets to which foreign borrowers are permitted
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