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This book offers a comprehensive analysis of the IMF's role in monitoring international borrowers, reducing default risks, and the impact on bank and bond markets. It explores the relevance of IMF programs, country debt thresholds, and the dynamics between lenders and borrowers. The research design examines the practical implications for lenders and the importance of country policy commitments in managing risks. Key features of bank and bond markets in the 1990s are also discussed to understand the evolution of borrowing patterns and market dynamics under IMF programs. The book provides valuable insights for policymakers and investors navigating international debt markets.
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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
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
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”
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
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)
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).
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).
Table 2: Number of Transactions, by Debt Category and IMF Program
Table 3: Choice of Loans and Bonds, Relative to No Borrowing Absolute value of z statistics in brackets, * significant at 5%; ** significant at 1%.
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
Table 4: Pricing of Loans and Bonds No. of Transactions 2,477 2,426 2,057 1,771 1,556 1,355
Table 5A: Loans: Impact of IMF Programs and Repeat Borrowing (1) (2) (3) (4) (5) (6) (7) (8) (9) Debt Range 25 - 45 30 - 50 35 - 55 40 - 60 45 - 65 50 - 70 55 - 75 60 - 80 65 - 85 (% of GDP) Spread Equation IMF Program 0.259 0.279 0.135 – 0.041 – 0.054 – 0.018 – 0.046 – 0.019 0.095 [6.88]** [7.39]** [3.10]** [0.77] [0.85] [0.29] [0.57] [0.20] [1.08] Repeat – 0.073 – 0.058 – 0.064 – 0.149 – 0.162 – 0.158 – 0.174 – 0.144 – 0.111 Borrowing [5.22]** [4.02]** [3.59]** [6.81]** [7.10]** [6. 38]** [5.54]** [3.64]** [2.41]* Selection Equation IMF Program 0.191 0.115 0.287 0.299 0.415 0.408 0.449 0.408 – 0.103 [2.79]** [1.66] [4.03]** [4.24]** [5.51]** [5.39]** [5.09]** [4.26]** [0.83] No. of 2,477 2,426 2,057 1 ,771 1,556 1,355 887 571 358 T ransactions Observations 3,941 3,804 3,354 3,102 2 , 899 2 , 647 1 , 970 1 , 471 949 Absolute value of z statistics in brackets, * significant at 5%; ** significant at 1% .
Table 5B: Bonds: Impact of IMF Programs and Repeat Borrowing (1) (2) (3) (4) (5) (6) (7) (8) (9) Debt Range 25 - 45 30 - 50 35 - 55 40 - 60 45 - 65 50 - 70 55 - 75 60 - 80 65 - 85 (% of GDP) Spread Equation IMF Program – 0.045 – 0.080 – 0.161 – 0.315 – 0.367 – 0.262 – 0.149 – 0.02 0.038 [1.09] [1.75] [2.9 1]** [4.41]** [4.67]** [2.70]** [1.45] [0.33] [0.48] Repeat – 0.012 – 0.008 0.001 0.027 0.048 0.049 – 0.018 0.011 0.006 Borrowing [0.79] [0.55] [0.04] [1.28] [2.08]* [1.39] [0.51] [0.36] [0.16] Selection Equation IMF Program 0.748 0.610 0.329 0.315 0.27 0 0.073 0.258 0.131 – 0.13 [10.49]** [8.58]** [4.35]** [4.02]** [3.24]** [0.88] [2.67]** [1.26] [1.02] No. of 1,497 1,539 1,116 899 707 580 352 272 200 T ransactions Observations 3 , 068 3 , 038 2 , 537 2 , 351 2 , 170 1 , 973 1513 1 , 212 814 Absolute value of z statistics in brackets, * significant at 5%; ** significant at 1% .
Table 6: Does the Amount of IMF Lending Matter? (1) (2) (3) (4) (5) (6) Loans Bonds Debt/GDP range Low Medium High Low Medium High Spread Equation IMF Program 0.479 0.589 –0.362 –2.101 0.311 –2.041 [0.45] [2.68]** [1.18] [1.17] [1.91] [4.11]** IMF*Debt/GDP –2.759 –1.688 0.245 7.088 –1.049 2.927 [0.83] [3.72]** [0.54] [1.18] [2.70]** [4.03]** IMF Amount/Debt 26.396 4.874 2.146 5.139 0.012 –3.505 [3.63]** [6.61]** [1.73] [1.34] [0.02] [2.08]* Log of Repeat Borrowing –0.164 0.070 –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 –0.400 0.006 0.433 0.245 0.370 [1.01] [2.47]* [0.02] [2.03]* [1.71] [1.90] Selection Equation IMF Program 0.991 –0.516 0.787 1.066 2.842 2.077 [1.09] [2.58]** [2.51]* [1.14] [12.16]** [6.15]** IMF*Debt/GDP –3.158 1.019 –0.811 –3.605 –5.883 –3.225 [0.93] [2.29]* [1.78] [0.99] [10.51]** [6.77]** IMF Amount/Debt –5.336 4.794 3.610 1.047 0.605 7.200 [4.51]** [8.88]** [3.70]** [0.44] [0.75] [5.68]** Observations 4,022 4,729 2,523 2,635 3,711 1,998 Robust z statistics in brackets, * significant at 5%; ** significant at 1%.
Table 7: Is Precaution Valuable? (1) (2) (3) (4) (5) (6) Loans Bonds Debt/GDP range Low Medium High Low Medium High Spread Equation IMF Program 0.552 0.283 – 0.021 0.038 0.006 – 0.119 [5.95]** [6.41]** [0.28] [0.39] [0.12] [1.42 ] Precautionary – 0.389 – 0.374 – 0.202 – 0.293 – 0.172 – 0.205 [2.64]** [5.36]** [2.13]* [2.51]* [3.11]** [1.51] Turned Precautionary – 0.100 – 0.149 – 0.212 – 0.270 [1.78] [1.60] [4.97]** [1.52] Log of Repeat – 0.191 – 0.081 – 0.166 – 0.082 0.005 – 0.001 Borrowing [14.55]** [6.25]** [5.73]** [3.39]** [0.30] [0.03] Selection Equation IMF Program 0.003 0.236 0.433 0.191 0.403 0.206 [0.03] [4.52]** [6.27]** [1.46] [7.70]** [2.52]* Precautionary – 0.446 – 0.377 – 0.415 – 0.141 – 0.419 – 0.196 [1.83] [5.38]** [4.38]** [0.43] [5.35]** [1.83] Turned Precautionary – 0.010 0.218 0.261 0.188 [0.17] [2.61]** [4.42]** [1.50] Observations 4 , 022 4 , 729 2 , 523 2 , 635 3 , 711 1 , 998 . Robust z statistics in brackets, * significant at 5%; ** significant at 1% ,
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?
