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Lending booms, reserves and the sustainability of short-term debt: inferences from the pricing of syndicated bank loans

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  • Eichengreen, Barry
  • Mody, Ashoka

Abstract

Academics pay little attention to international bank lending, focusing instead on rapidly growing market segments such as the international bond market and derivative credit instruments. The authors argue for paying more attention to international bank lending. Why? Three reasons. First, the syndicated bank loan is one of the workhorses of international capital markets. Second, international bank lending is especially important for private-sector borrowers, whose participation in international capital markets will grow as capital markets are liberalized and state enterprises privatized. Sovereigns and other governmental borrowers rely more on the bond market, while private borrowers are disproportionately important to the market in international bank loans. Private-sector borrowers establish long-term relationships with banks to resolve information problems. The authors find that international banks provide more credit to smaller borrowers (about whom information is least complete) than bond markets do. Bank finance dominates that segment of international financial markets with the greatest information asymmetry. Third, spreads on syndicated bank loans show much less variation than spreads on international bonds. Are bank lenders properly pricing country and credit risk? Does spread compression on syndicated bank loans suggest excessive moral hazard in international bank lending? The authors warn against over-dependence on high levels of domestic debt. While growth in domestic debt reflects improved inter-mediation between savers and investors, rapid increases to high levels are viewed as unsustainable and raise the cost of international borrowing. They find evidence of growing bullishness among bank lenders to East Asia in the first half of the 1990s, which could reflect moral hazard, but the jury is still out on that issue. High external short-term debt can coexist with rapid growth for extended periods but is likely to unravel if perceptions of sustainability shi

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 63 (2000)
Issue (Month): 1 (October)
Pages: 5-44

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Handle: RePEc:eee:deveco:v:63:y:2000:i:1:p:5-44

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  1. Eichengreen, Barry & Mody, Ashoka, 1998. "Interest Rates in the North and Capital Flows to the South: Is There a Missing Link?," International Finance, Wiley Blackwell, vol. 1(1), pages 35-57, October.
  2. Ross Levine & Sara Zervos, . "Stock markets, banks and economic growth ," CERF Discussion Paper Series 95-11, Economics and Finance Section, School of Social Sciences, Brunel University.
  3. Preece, Dianna & Mullineaux, Donald J., 1996. "Monitoring, loan renegotiability, and firm value: The role of lending syndicates," Journal of Banking & Finance, Elsevier, vol. 20(3), pages 577-593, April.
  4. Sebastian Edwards, 1985. "The Pricing of Bonds and Bank Loans in International Markets: An Empirical Analysis of Developing Countries' Foreign Borrowing," NBER Working Papers 1689, National Bureau of Economic Research, Inc.
  5. James, Christopher, 1990. "Heterogeneous creditors and the market value of bank LDC loan portfolios," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 325-346, June.
  6. International Monetary Fund, 1996. "The Economic Content of Indicators of Developing Country Creditworthiness," IMF Working Papers 96/9, International Monetary Fund.
  7. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
  8. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
  9. Barry Eichengreen & Ashoka Mody, 1998. "What Explains Changing Spreads on Emerging-Market Debt: Fundamentals or Market Sentiment?," NBER Working Papers 6408, National Bureau of Economic Research, Inc.
  10. Stanley Fischer, 1999. "On the Need for an International Lender of Last Resort," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 85-104, Fall.
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