FINANCIAL INSTABILITY AND THE INTERNATIONAL DEBT PROBLEM

Transcription

1 FINANCIAL INSTABILITY AND THE INTERNATIONAL DEBT PROBLEM

2 Financiallnstability and the International Debt Problem George McKenzie Direetor Centre/or International Eeonomies, University 0/ Southampton and Stephen Thomas Leeturer Department 0/ Aeeounting and Management Scienee, University 0/ Southampton Palgrave Macmillan

3 ISBN ISBN (ebook) DOI / George MeKenzie and Stephen Thomas, 1992 Softcover reprint of the hardcover Ist edition 1992 All rights reserved. For information, write: Seholarly and Referenee Division, St. Martin's Press, Ine., 175 Fifth Avenue, New York, N.Y First published in the United States of Ameriea in 1992 ISBN Library of Congress Cataloging-in-Publieation Data MeKenzie, George W. Financial instability and the international debt problem / George MeKenzie and Stephen Thomas. p. em. Includes bibliographical referenees (p. ) and index. ISBN International finanee. 2. Intermediation (Finanee) 3. Debts, ExternaJ. I. Thomas, Stephen (Stephen H.) 11. University of Southampton. Centre for International Economics. III. Title. HG3823.M '435~e CIP

4 Contents List 01 Tables List 01 Figures Acknowledgements PART ONE: Understanding the Behaviour of Financial Intermediaries 1 The Fundamentals 2 Objective Risk Assessment 3 A Behavioural Approach to Financial Institutions' Behaviour vi vili ix PART TWO: The Evolving Debt Crisis 4 International Debt: The Anatomy of a Financial Crisis, The Maturing Crisis: PART THREE: Responses to the Debt Crisis 6 The Market's Response: Debt Swaps The Regulator's Response: The BIS Capital Adequacy Proposals 163 Appendices 1 Annexes to BIS, International Convergence 01 Capital Measurement and Capital Standards, Basle, July A Model of Bank Behaviour 205 Bibliography 207 Index 209 v

5 List of Tables 1.1 New international bank lending: bonds and bank credits Externa1 debt service ratios for developing countries Prob ability information Summary of payments balances on current account, Non-oil developing countries: merchandise exports and imports, Developing countries: changes in output, Estimated Eurocurrency market size Oil-exporting countries: estimated disposition of current account surplus, Non-oil developing countries: long-term and short-term external debt relative to exports, Non-oil developing countries: debt service payments on short-term and long-term external debt, OECD member countries' policies regarding the establishment of foreign bank agencies or branches and subsidiaries Externallending and deposit-taking of banks in the BIS reporting area, Share of claims on developing countries and centrally planned economies in banks' net international claims, Sovereign loans as proportion of syndicated internationallending, Countries reviewed, ranked by debt to banks at end of December Long-term bank debt restructured, (third quarter) External financing requirements, capital importing countries, Debt service ratios, Long- and short-term external debt relative to exports, VI

6 List 0/ Tables vii 5.5 Developing countries: external debt Terms of long-term bank credit commitments, 1981 to third quarter Financing instruments and options in new money packages and restructurings of bank debt of selected developing countries, Assets and capital of US banks, 1977 to first half Volume of debt conversion: face value of debt retired Market prices for developing country debt Mexico: debt-equity conversion programme, Japanese city banks' assets and reserves Bank of England matrix of debt recoverability Difference in risk measurements J.P. Morgan: effect of Basle capital proposals 188 Al.1 Transitional arrangements 201

7 List of Figures 2.1 Probability distribution Continuous probability distributions Indifference curves for a risk averter Inconsistent indifference curves Indifference curves for a risk lover The optimal portfolio The optimal portfolio: (a) risk averter; (b) risk lover Effect of incorrect assessment of opportunity locus Summary of behavioural theories of profit-seeking organisations Terms on international bank lending, OPEC exporter deposits $100 million directly with US banking system OPEC exporter purchases $100 million US securities from US dealers Developing country purchases $100 million in goods and services from the USA A typical debt-equity swap Banking operation with a leverage of five Maximising profits relative to capital Relaxing assumptions Imposing the assetlcapital ratio Aspects of the double-ieveraging of bank equity 179 viii

8 Acknowledgements This volume began life as a research report prepared for the United Nations Conference on Trade and Development in We wish to thank Shahen Abrahamian for his encouragement and helpful comments upon this early work which now forms the basis for Part Two of this volume. Since then we have undertaken many additions and revisions, a reflection of the dynamic nature of the international banking problem. We would like to thank the Department of Economics and the University of Southampton for providing the secretarial support. In particular, thanks are due to Sarah Rollason, Carol Willison and Christine Blanc for their tireless efforts. GEORGE MCKENZIE STEPHEN THOMAS ix