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Monitoring International Borrowers: The IMF’s Role in Bank and Bond Markets Barry Eichengreen, Kenneth Kletzer, and Ashoka Mody June 15, 2004.

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Presentation on theme: "Monitoring International Borrowers: The IMF’s Role in Bank and Bond Markets Barry Eichengreen, Kenneth Kletzer, and Ashoka Mody June 15, 2004."— Presentation transcript:

1 Monitoring International Borrowers: The IMF’s Role in Bank and Bond Markets Barry Eichengreen, Kenneth Kletzer, and Ashoka Mody June 15, 2004

2 IMF Program Functions Monitoring –Reveals country policies and intentions –Hence, reduces variance of expected policy outcomes –But only if country commitment is credible Lending –Reduces likelihood of default –Hence, lowers probability of costly creditor coordination and restructuring

3 Research Design Banks versus Bonds –If banks already provide monitoring, then is IMF monitoring relevant mainly for bonds? Country Debt Thresholds –Vulnerability to external debt increases non-linearly –Debt thresholds demarcate: Liquidity risk (30-55%), Solvency Risk (55%+) Country policy commitments Precautionary Programs –“outset” and “turned”

4 Theoretical Considerations Country fundamentals and policies: –determine ability and willingness of the government and private debtors to repay debt –beyond debt threshold, market access and spreads worsen Information asymmetries generate risk premia: –borrower-lender pairs sort into different markets for different types of monitoring; –banks “delegated” monitors: repeated borrowing; –IMF programs more relevant in bond markets –precautionary programs particularly relevant Banks coordinate creditors and restructuring

5 Data Loanware and Bondware Individual transactions, 1991-2002 Characteristics at initiation of transaction –E.g., Spreads, maturity, amount Supplemented with: –Global characteristics (US growth, swap rates, volatility of EMBI) –Country features (e.g., debt/GDP, growth)

6 Key features of bank and bond markets 1990s saw revivial of bond markets Banks, as delegated monitors, allow: –Lower entry barriers, steadier access –Smaller, more diverse, episodic borrowing Shift to bonds under IMF program –22 percent of all loans under IMF program –33 percent of all bonds during program –IMF programs especially facilitate bonds by mid-level debt countries (30-50% of GDP).

7 Table 1: Trends in International Bond and Bank Lending Number of Transactions Aggregate Value of Transactions (US$ billions) YearBondsLoansTotalBondsLoansTotal 199181209290102434 1992177252429211839 1993357376733452773 1994307508815394079 19953697501,1194856104 19965221,0661,5888183164 19975551,2481,803100125225 19982345507845262114 19993344027366547113 20002845328165981141 20012904707607862140 20022193846036344107 Total3,7296,74710,4766616691,331

8 Repeated Borrowing Measure takes value 1 for borrower’s first international debt contract in that market. Each subsequent borrowing increases the value of R by one. More repeated borrowing in the bond market: –median number of bond borrowings is 3 (75th percentile is 8 and 90th percentile is 27); –for banks, the median is 2 (75th percentile is 4 and 90th percentile is 8).

9 Table 2: Number of Transactions, by Debt Category and IMF Program Type of Credit Low Debt/GDP Range (0-30 percent) No ProgramIMF Program None1,301389 Bonds1,24457 Loans2,60699 Medium Debt/GDP Range (30-55 percent) No ProgramIMF Program None973561 Bonds9581,000 Loans2,094898 High Debt/GDP Range (more than 55 percent) No ProgramIMF Program None675808 Bonds253217 Loans589461 Full Sample No ProgramIMF Program None2,9491,758 Bonds2,4551,274 Loans5,2891,458

10 Table 3: Choice of Loans and Bonds, Relative to No Borrowing (1) (2) (3) (4) (5) (6) Debt/GDP<=0.30.30.55 Bonds LoansBondsLoans BondsLoans IMF Program0.3080.1460.8270.3690.6740.894 [1.19][0.61][6.41]**[2.88]**[3.79]**[5.71]** Precautionary–0.335–1.001–0.963–0.758–0.519–0.756 [0.51][1.69][4.75]**[3.89]**[2.34]*[3.83]** Turned Precautionary0.340 [1.93] 0.211 [1.20] 0.204 [0.80] 0.314 [1.42] Absolute value of z statistics in brackets, * significant at 5%; ** significant at 1%.

11 Testing for Effects on Spreads log (spread) = βX + u1 (1) B' = γZ + u2 (2) u1 ~ N(0,σ), u2 ~ N(0,1), corr (u1, u2 ) = ρ

12 Table 4: Pricing of Loans and Bonds (1) (2) (3)(4)(5)(6) LoansBonds Debt/GDP range LowMediumHighLowMediumHigh Spread Equation IMF Program0.5290.152–0.1300.018–0.096–0.233 [5.98]**[4.33]**[2.13]*[0.20][1.88][3.03]** Log of Repeat Borrowing–0.192–0.079–0.162–0.0810.003 [14.57]**[6.06]**[5.60]**[3.36]**[0.16][0.13] Selection Equation IMF Program–0.0670.1480.3720.1680.4210.186 [0.64][3.72]**[6.81]**[1.35][9.20]**[2.65]** Observations 4,022 4,729 2,523 2,635 3,711 1,998 Robust z statistics in brackets, * significant at 5%; ** significant at 1%. No. of Transactions 2,477 2,426 2,057 1,771 1,556 1,355

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15 Table 6: Does the Amount of IMF Lending Matter? (1)(2)(3)(4)(5)(6) LoansBonds Debt/GDP rangeLowMediumHighLowMediumHigh Spread Equation IMF Program0.4790.589–0.362–2.1010.311–2.041 [0.45][2.68]**[1.18][1.17][1.91][4.11]** IMF*Debt/GDP–2.759–1.6880.2457.088–1.0492.927 [0.83][3.72]**[0.54][1.18][2.70]**[4.03]** IMF Amount/Debt26.3964.8742.1465.1390.012–3.505 [3.63]**[6.61]**[1.73][1.34][0.02][2.08]* Log of Repeat Borrowing–0.1640.070–0.167–0.156–0.088–0.243 [5.75]**[1.14][0.87][3.28]**[1.38][1.75] Repeat*Debt/GDP–0.153–0.4000.0060.4330.2450.370 [1.01][2.47]*[0.02][2.03]*[1.71][1.90] Selection Equation IMF Program0.991–0.5160.7871.0662.8422.077 [1.09][2.58]**[2.51]*[1.14][12.16]**[6.15]** IMF*Debt/GDP–3.1581.019–0.811–3.605–5.883–3.225 [0.93][2.29]*[1.78][0.99][10.51]**[6.77]** IMF Amount/Debt–5.3364.7943.6101.0470.6057.200 [4.51]**[8.88]**[3.70]**[0.44][0.75][5.68]** Observations 4,0224,7292,5232,6353,7111,998 Robust z statistics in brackets, * significant at 5%; ** significant at 1%.

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17 Conclusions Evidence consistent with segmentation of bank and bond markets Repeated borrowing more valuable for banks but not for bonds IMF monitoring more valuable in bond markets: –Especially in mid, liquidity risk zone –Lending amount more important when solvency at stake IMF redressed disadvantage of bond markets, helping it grow in 1990s: –But contributed to moral hazard and debtor coordination problems?


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