I. Overview and Current Issues

International Monetary Fund
Published Date:
January 1992
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This report reviews recent developments in private market financing for developing countries.1 The last year has witnessed rapid change, as several major debtors have reached agreement with bank creditors on debt restructuring packages and as the re-entry into international capital markets by a number of middle-income countries has gathered momentum. As a result of these developments, the key external financing issues for a number of developing countries now concern the management of new spontaneous flows, rather than dealing with the existing debt. Nevertheless, for many developing countries, debt problems remain severe, and continuing attention will be needed by both debtors and the international financial community to expedite their satisfactory resolution.

Commercial Bank Debt Restructurings

During the past year, a number of countries have progressed toward restructuring their commercial bank debt (Table 1). Argentina and Brazil have both reached agreement with commercial bank creditors on term sheets for restructuring packages that involve debt and debt-service reduction options, as well as consolidating existing arrears. In the case of Brazil, the agreement included provisions for the delivery of enhancements to be phased over a two-year period. These two agreements are particularly significant in terms of the amount of debt involved and the protracted histories of arrears. Among other countries, Nigeria signed a package involving debt and debt-service reduction in December 1991. The Philippines, which in February 1992 reached agreement with banks on a term sheet for a comprehensive debt package, completed the buy-back portion of the package in May. The rest of the package has been signed and is expected to be closed before the end of the year. In addition, Mozambique completed a buy-back of the bulk of its commercial bank debt, while Bolivia and Guyana have recently reached agreements with creditor banks on term sheets for debt reduction packages. A number of other countries have also made progress in negotiations on concrete and comprehensive proposals with their commercial bank creditors.

Table 1.Chronology of Bank Debt Restructurings and Bank Financial Packages, 1984–September 1992
Agreement classified by month of signature1
Brazil: January2

Chile: January, June, and November

Sierra Leone: January

Guyana: January, July (deferment)

Nicaragua: February (deferment)

Peru: February3

Senegal: February

Niger: March

Mexico: April (new financing only)

Sudan: April (modification of 1981 agreement)

Yugoslavia: May

Jamaica: June

Zaïre: June (deferment)

Poland: July2

Madagascar: October

Liberia: December2

Zambia: December3
Côte d’lvoire: March2

Mexico: March, August

Costa Rica: May2

Senegal: May

Philippines: May2

Zaïre: May (deferment)

Guyana: July (deferment)

Argentina: August2

Jamaica: September

Panama: October2

Sudan: October (modification of 1981 agreement)

Chile: November2

Colombia: December5

Ecuador: December2

Madagascar: December (modification of 1984 agreement)

Yugoslavia: December
Dominican Republic: February

Morocco: February

Venezuela: February

South Africa: March (standstill)

Niger: April

Zaïre: May (deferment)

Brazil: July

Uruguay: July

Poland: September2

Romania: September

Congo: October2, 3

Côte d’lvoire: December
South Africa: March

Mexico: March (public-sector debt);2

August (private-sector debt)

Jamaica: May

Mozambique: May3

Zaïre: May (deferment)
Chile: June

Honduras: June3

Madagascar: June (modification of 1985 agreement)

Argentina: August2

Morocco: September

Romania: September (modification of 1986 agreement)

Bolivia: November (amendment to 1981 agreement)

Nigeria: November2, 3

Venezuela: November

Gabon: December4

Philippines: December
Gambia, The: February

Chile: August (amendment to 1987 agreement)3

Uruguay: March (modification of 1986 agreement)

Côte d’lvoire: April2, 3

Guinea: April

Togo: May

Poland: July

Yugoslavia: September2

Malawi: October

Brazil: November2
Nigeria: April

Zaïre: June (deferment)

Poland: June (deferment)3

Honduras: August3

Niger: October3

Poland: July (deferment)3

Trinidad and Tobago: December
Philippines: February2

Mexico: February2

Madagascar: April

Bulgaria: April (standstill)3

Costa Rica: May

Jamaica: June

Morocco: September

Senegal: September

Chile: December (amendments to previous agreements)

Venezuela: December2
Colombia: April5

Niger: April

Uruguay: January2

Brazil: May6

U.S.S.R.: December (deferment)

Mozambique: December

Nigeria: December
Algeria: March

Gabon: May

Argentina: June7

Bolivia: July7

Philippines: July2

Guyana: August7

Brazil: September7
Under negotiation
BulgariaDominican RepublicNicaragua
Côte d’lvoireJordanPoland
Sources: Restructuring agreements.Note: “Restructuring” covers rescheduling and also certain refinancing operations.

Agreement either signed or reached in principle (if signature has not yet taken place); not all signed agreements have become effective.

The restructuring agreement includes new financing.

Agreed in principle or tentative agreement with banks’ Steering Committees.

A separate club deal for new financing was arranged at the same time.

Refinancing agreement.

Preliminary agreement on interest arrears.

Agreement on term sheet.

Sources: Restructuring agreements.Note: “Restructuring” covers rescheduling and also certain refinancing operations.

Agreement either signed or reached in principle (if signature has not yet taken place); not all signed agreements have become effective.

The restructuring agreement includes new financing.

Agreed in principle or tentative agreement with banks’ Steering Committees.

A separate club deal for new financing was arranged at the same time.

Refinancing agreement.

Preliminary agreement on interest arrears.

Agreement on term sheet.

Recent progress toward restructuring bank debt has been facilitated by improved policies and performance in the debtor countries concerned. This has helped mobilize support from official sources and has attracted private capital inflows, which has put the countries in a better position to contribute from their own resources to debt operations. Bank creditors themselves have been more amenable to restructuring in an environment where secondary market discounts on bank claims were falling significantly below the level of bank provisioning. This has allowed banks to realize substantial book profits by participating in debt operations.

Once debt operations for Argentina, Brazil, and the Philippines are completed, eight countries—holding about 90 percent of the stock of commercial bank debt for all rescheduling countries at the end of 1989—will have achieved comprehensive bank debt restructurings involving debt and debt-service reduction options. In addition, three low-income countries have eliminated the bulk of their bank debt through cash buy-backs at deep discounts. In packages completed through September 1992, $88 billion of bank debt has been restructured, reducing claims payable to banks by debtor countries by some $41 billion (Table 2). Moreover, remaining payments to banks have been flattened and extended over periods of up to 30 years, while reduced-interest par bond exchanges have had the additional effect of establishing a fixed path for interest rates instead of a floating rate. The cost of these operations (including buy-backs, purchasing collateral, and downpayments on arrears) is estimated at $15 billion. Direct support from the World Bank and the IMF has totaled approximately $2½ billion and $2¼ billion, respectively, with the remainder coming from bilateral sources and countries’ own reserves. The World Bank’s International Development Association’s (IDA) debt reduction facility and bilateral donors have played an important part in financing debt operations of low-income countries.

Table 2.Commercial Bank Debt and Debt-Service Reduction Operations, 1987–June 19921(In millions of U.S. dollars)
Debt and Debt-Service Reduction
Debt ReductionDebt-Service Reduction




Par Bond3

Par Bond3
CollateralizationTotalTotal Debt


Cost of


(In percent)
Bolivia (1987)473253182744293.535
Chile (1988)439439439100.0248
Costa Rica (1989)1,570991101361,15773.8225
Mozambique (1991)124124124100.012
Niger (1991)111111111100.023
Nigeria (1991)5,8113,3906513524,76682.02,081
The Philippines5,9572,6025531244623,74162.81,786
Uruguay (1991)1,6086331609588855.2463
Venezuela (1989)19,7001,4115432,1954881,7396,37632.42,585
of which:
since March 198983,1129,2627,73410,6897139,86638,66646.514,300
Sources: IMF staff estimates.

Excludes debt extinguished through debt conversions.

Includes past-due interest and debt restructured under new money option for Mexico (1989), Uruguay (1991), and Venezuela (1989); the Philippines’ (1989) new money option was not tied to a specific value of existing debt.

Excludes prepayment of principal and interest through guarantees.

Includes payment of past-due interest.

Includes principal and interest guarantee, buy-back costs, and payments of past-due interest, and for Venezuela resources used to offer comparable collateral for bonds issued prior to 1990.

Estimates based on tenders by commercial banks for 95 percent of the eligible debt.

Sources: IMF staff estimates.

Excludes debt extinguished through debt conversions.

Includes past-due interest and debt restructured under new money option for Mexico (1989), Uruguay (1991), and Venezuela (1989); the Philippines’ (1989) new money option was not tied to a specific value of existing debt.

Excludes prepayment of principal and interest through guarantees.

Includes payment of past-due interest.

Includes principal and interest guarantee, buy-back costs, and payments of past-due interest, and for Venezuela resources used to offer comparable collateral for bonds issued prior to 1990.

Estimates based on tenders by commercial banks for 95 percent of the eligible debt.

Debt conversions have also played a substantial role in reducing commercial bank debt. The pace of such conversions, however, has slowed over the past year in response to lower secondary market discounts on external debt and to a drop in privatization-related conversions. In total, about $40 billion of public-sector bank debt has been converted to equity claims through official debt-conversion schemes since 1984, with Argentina and Chile accounting for about half the total. Debt-for-development conversions (particularly debt-for-nature swaps)—of particular interest to low-income countries—have provided an alternative means of reducing debt claims, although the total amount of claims eliminated through such operations to date is only about $640 million.

Notwithstanding this progress, many developing countries continue to face serious debt problems vis-à-vis commercial banks. For most of these countries, it seems likely that bank debt restructuring will eventually be called for. Strong policy performance will be a prerequisite for such operations in order to establish an appropriate environment in which debt restructuring can allow for a normalization of creditor relations and foster renewed access to spontaneous flows. In addition, the accumulation of interest arrears has complicated relations with banks in a number of countries. As adjustment efforts progress, an eventual regularization of relations with bank creditors will likely require a demonstration of commitment by governments to this objective, including through payments to reduce arrears or slow their increase.

For low-income countries, progress toward bank debt restructuring has been particularly slow. This experience has reflected a number of elements, including difficulties in sustaining adjustment efforts; the apparent low priority placed by banks on reaching agreement in cases where they are heavily provisioned, discounts are high, and exposure is relatively small; the lengthy time needed to resolve legal and other technical details and to mobilize sufficient donor support; and competing uses in the debtor country for limited financial resources, including in some cases the need to regularize payments positions with the IMF and other multilateral creditors. Nevertheless, unresolved debt problems with private creditors do have an adverse impact on the country by affecting access to, and raising the cost of, even short-term trade credits. Normalization of relations with private external creditors will eventually be required to re-establish external viability, and creditors and donors should stand ready to support appropriate bank debt operations for countries that sustain strong policies.

New Private Financing

Recent Experience

The re-entry to international capital markets by certain middle-income countries that had experienced debt-servicing difficulties gathered momentum over the past year. Total bond issues in international markets by the main re-entrants accounted for over half of issues by developing countries in this period. Since re-entering the market in July 1991, Brazil has obtained the largest volume of such financing, notwithstanding continuing negotiations with commercial banks on a debt package, while Mexico has remained at the forefront in gaining improved terms and launching innovative instruments. Uruguay has recently joined the list of rescheduling countries that have returned to international bond markets after a prolonged absence. Equity portfolio flows to market re-entrants have also grown rapidly, reflecting buoyancy of local stock prices, new opportunities created by privatization (particularly in Mexico and Argentina), and liberalized restrictions on foreign investment (notably in Brazil). Nevertheless, against these overall trends, market conditions have tightened for some countries in the face of unfavorable events.

International markets for developing country securities have continued to mature, offering increasing liquidity, a widening range of currencies, longer maturities, narrowing spreads, and an expanding range of derivative products. These developments have encouraged an expansion of the investor base. According to market participants, while initial flows were generated mainly from flight capital, the past year has witnessed increased involvement by global investor funds and wealthy individual investors. Moreover, traditional institutional investors (pension funds and insurance) and the retail sector have shown some interest, although these groups still account for only a small share of the total. This process has been particularly notable among U.S. investors, reflecting traditionally close economic ties with the Latin American re-entrants, greater familiarity with investments in high-yielding securities, and the impetus provided by the decline in U.S. short-term interest rates.

In contrast to the experience in securities markets, new bank lending to market re-entrants has remained limited and is confined mainly to short-term trade lines or project financing. Moreover, lending operations tend to be structured to protect against country transfer risk, through, for example, cofinancing with international organizations, export credit guarantees, or collateralization. Continued bank caution, reflected in high spreads and declining maturities (Chart 1), has resulted from a number of forces. These include the difficult financial situation of many major international banks, constraints on their global lending activities associated with the implementation of the Basle capital adequacy guidelines, and the perception that unsecured bank debt would be treated as a relatively junior claim if countries encountered renewed debt-servicing difficulties in the future.

Chart 1.Terms on International Bank Lending Commitments, 1973–May 1992

Source: Organization for Economic Cooperation and Development, Financial Market Trends.

1New publicized long-term international bank credit commitments.

2Developing country data do not include Kuwait and Saudi Arabia for 1991 and 1992.

Provisioning requirements on exposure to countries that have experienced debt-servicing difficulties may also influence new bank lending. In this regard, under most regulatory regimes, short-term credits and project lending that are adequately secured are exempted from provisioning requirements. In contrast, high provisioning requirements on unsecured medium-term loans may be an additional disincentive to such lending. Responding to concerns about continued provisioning requirements against lending to countries that have achieved a sustained improvement in performance, regulatory authorities in a number of creditor countries have “graduated” several developing countries from the lists of countries against which provisions must be held. Such actions, however, are unlikely to trigger a resurgence of bank lending to these countries, given the general constraints on bank activities.

Countries that have avoided debt-servicing problems have generally maintained their access to international capital markets. As in the past, the situations of individual countries varied with domestic and external conditions during the last year. Several Asian countries attracted large volumes of bank lending and portfolio inflows. Two Middle Eastern oil-exporting countries received substantial bank commitments to meet their financing needs, while Tunisia obtained a syndicated bank loan for the first time in six years. Hungary and Turkey borrowed significant amounts on international bond markets at improving terms, as investors reacted favorably to the maintenance of sound economic policies and, in the case of Turkey, to the achievement of an investment-grade credit rating.

In a number of countries, including market reentrants and those that have maintained access, international securities issues have contributed to large net capital inflows, creating pressures on macroeconomic stabilization programs and raising concerns about a renewed buildup in indebtedness. The authorities in many of these countries have adjusted monetary and fiscal policy to offset these effects, at least in part. A number of countries have supplemented macroeconomic policy adjustments with administrative measures to limit inflows more directly. Such measures have included controls on international issues and tighter restrictions on offshore activities of domestic banks.

Sustainability of Market Access

Although renewed access to private capital flows can contribute importantly to realizing growth and development prospects in developing countries, it also raises difficult policy issues. External debt ratios have been reduced substantially over the past decade by market re-entrants but remain relatively high relative to countries that avoided debt-servicing difficulties (Table 3). The danger remains of again running into debt-servicing difficulties if economic policy and debt are not properly managed. In this regard, two questions are key:

  • Are the new flows sustainable and expandable? and
  • How vulnerable are market re-entrants to shifts in the availability of external financing?
Table 3.Countries with Market Access: Debt and Debt-Service Indicators
External Debt1Interest Due2
As Percent of

Exports of

Goods and Services
As Percent of GDP3As Percent of

Exports of

Goods and Services
Recent Re-Entrants
South Africa1137132.
Sources: IMF, World Economic Outlook database (May), and IMF staff estimates.

Excluding IMF purchases.

On accrual basis, including interest on short-term debt and IMF charges.

GDP adjusted for variations in real exchange rates, using 1991 as base year.

Sources: IMF, World Economic Outlook database (May), and IMF staff estimates.

Excluding IMF purchases.

On accrual basis, including interest on short-term debt and IMF charges.

GDP adjusted for variations in real exchange rates, using 1991 as base year.

The history of private financing flows to developing countries has been marked by repeated episodes of lending surges followed by a market correction, debt-servicing difficulties, and a curtailment of market access.2 Market corrections have been triggered by a variety of events, including adverse commodity price movements, tighter external financial conditions, and failure of local investments. Such corrections have usually led to a fundamental reappraisal of the risks involved in future financing. The debt crisis that broke out in 1982 was influenced by all of these factors. In contrast, over the past decade a number of countries—particularly in East Asia—have been able to avoid debt-servicing difficulties and sustain access, successfully weathering shifts in market sentiment related to political or economic setbacks. Which of these two patterns will apply to the recent and prospective market re-entrants will depend on a range of influences, including the strength of policies in borrowing countries, the ability to extend the investor base, and the appropriate pricing of risks.

The fundamental condition for sustaining capital inflows is that the recipient economy be able to generate sufficient returns in foreign currency to meet the ensuing costs of servicing debt or equity obligations. Although rising rates of domestic investment are important, the funds must also be directed toward productive and internationally competitive activities. In the 1970s and early 1980s, a substantial proportion of investment was misallocated, either within the public sector or in protected segments of the private sector that were not competitive by global standards. This occurred in an international environment in which interest rates were often negative in real terms. Moving away from such policies, market re-entrants have progressed toward implementing macroeconomic adjustment and structural reform programs aimed at creating stable domestic financial environments, shifting the orientation of local producers to world markets and reducing the role of the public sector.

To sustain spontaneous flows, it will be important to build on such policies and broaden the investor base for the securities of re-entrant countries, both in terms of type of investor and geographical location. A narrow base raises the possibility that investor portfolios may become saturated, a development already reported in certain segments of the market. Moreover, a narrow base implies excessive sensitivity to events affecting particular groups of investors, such as, for example, movements in U.S. interest rates.

A broader investor base poses challenges of its own. It raises questions, for example, about whether risks and returns are appropriately matched. Concerns have arisen that while initial flows to some reentrants were probably financed largely from flight capital of investors well acquainted with the countries involved, the reported spread of investor interest to other groups over the past year may mean that risks involved in developing country investments are less well assessed. To be sure, there are signs that investors are at least partly aware of the risks involved, such as the tiering of pricing between different borrowers, the increasing use of derivative products, and the growing availability of information from market reports and credit rating agencies. Nevertheless, the rapid pace of re-entry, as well as experience in other financial markets involving high risk, suggests that the process could go too far too fast, raising the prospect of a market correction when the true risks involved become more apparent.

From this perspective, in considering policy actions by borrower or creditor countries aimed at extending the investor base, investors must take adequate account of the risks involved. Indeed, the most effective means of broadening investor participation in this market will be to reduce associated risk, both by decreasing underlying uncertainties and ensuring increased provision of information. Most important, the consolidation of economic and political stability would help justify investment-grade credit ratings and encourage the involvement of such investor groups as pension funds and insurance companies. In those countries where arrears on existing bank debt continue to accumulate, it will be essential to complete restructuring packages and regularize creditor relations to dispel related uncertainties. In addition, foreign portfolio investment will be promoted and put on a sounder footing by institutional reforms aimed at improving the functioning of local capital markets—including actions to improve financial regulation and supervision, raise accounting and disclosure standards, protect against insider trading, and improve clearance and settlement systems.

For creditor countries, there may be further scope for modifying regulatory regimes that discourage the holding of claims on countries re-entering international markets. Steps already taken in this direction include relaxation of restrictions on issues in the private placement market of the United States, and adjustments in provisioning requirements in some countries in response to sustained improvements in creditworthiness by a number of borrowers. In considering further measures in this area, adequate protection for investors must be maintained, and prudential standards for financial institutions must be consistent with the risks involved.

Vulnerability to Fluctuations in External Financing

In looking at the durability of the market re-entry process, it must be recognized that volatility in external financing flows cannot be avoided entirely, even with improved economic performance and increasingly sophisticated markets. Integration into international capital markets necessarily implies exposure to shifts in global market conditions. For example, a reversal of the current low short-term interest rates in the United States could have an adverse impact on financing terms for developing countries. Moreover, shocks may also occur, in the form of domestic or international events, that lead to shifts in investor sentiment. In these circumstances, the domestic economic system must be sufficiently resilient to ensure that the inevitable shocks can be absorbed without triggering liquidity crises and renewed debt-servicing problems.

An economy’s vulnerability to shifts in external financing depends most fundamentally on the soundness of its economic policies; sound policies provide the capacity to respond to changed circumstances. Recent policy reforms and a build-up in international reserves in some countries should make them generally better placed to respond to adverse events than they were in the early 1980s. For a number of market re-entrants, vulnerability is also reduced since a significant proportion of restructured bank debt bears interest at fixed rather than floating rates, thus limiting the direct impact of an increase in international interest rates. In addition, some borrowing countries are making increased use of hedging techniques to protect against external interest rate or commodity price fluctuations.

The evolving nature of new financing flows in the 1990s, relative to earlier decades, will also enhance resilience in the face of adverse events.3 The increased share of equity flows (both direct and portfolio investments) in total financing, and the rising proportion of borrowing by the private sector, imply a greater and more transparent sharing of risk between debtors and creditors through established mechanisms, including variations in dividend payments and stock prices, and, in extreme cases, the application of bankruptcy procedures. In contrast, in the 1980s, debt problems largely centered on the bank debt of sovereign borrowers, which could not be resolved until new mechanisms were put in place to deal with sovereign claims. The current trend toward equity financing would be encouraged by such actions as liberalization of restrictions on foreign entry, membership in existing multilateral guarantee programs, exchange system liberalization, and privatization programs that open up new areas for investment.

This discussion does not imply that rising levels of private external obligations should not be a serious concern for public policy. The point has been illustrated by the experience of some countries whose heavy external borrowing in the late 1970s and early 1980s was directed mainly at the private sector. When private flows began to reverse, government policy sought to limit the effects on the economy through exchange rate guarantees and other schemes that effectively converted a substantial proportion of private debt into public debt as exchange rates eventually depreciated. More generally, while limited private bankruptcies may be absorbed within a healthy economy, the externalities involved in broken contracts and the negative impact on aggregate demand may generate pressures for a public response, including through the assumption of private obligations by the public sector. This perception may lead to problems of moral hazard if the market behaves as if the government is providing an implicit guarantee. Solid economic policies are needed to make credible a government’s commitment to avoid such problems.

The fact that a high proportion of recent financial flows to market re-entrant countries has been channeled through securities markets—rather than syndicated medium-term bank lending as in the late 1970s and early 1980s—also has important consequences for the resilience of the system. First, there is greater scope for timely price signals to borrowers about emerging difficulties before the situation deteriorates to the point where access would be cut off. If a crisis does emerge, it would be more difficult to organize a concerted response to sustain external financing since threatened claims would be dispersed among numerous bondholders, rather than concentrated in a syndicate of banks. This would complicate the response to a renewed bout of debt-servicing difficulties. Moreover, issues would arise about the priority to be given to servicing different types of claims in the absence of a well-defined seniority structure.

In sum, a number of key differences between the recent experience of market re-entrants and that of the late 1970s and early 1980s point to the greater sustainability of current financial flows. These differences include the pursuit of stronger stabilization and structural reform policies, the higher proportion of total financing for the private sector, and the greater role of equity financing. Nevertheless, important risks remain, even if the private sector is the predominant borrower. Levels of debt are still relatively high, and there are questions about the adequacy of risk assessment by the new investors and about perceptions of implicit government guarantees. The channeling of debt flows through securities markets, rather than through syndicated bank lending, is very positive in important respects, but it could make a crisis more difficult to manage in the future. Such risks underline the importance of sound economic policies in the countries receiving capital inflows.


The report covers developments through September 1992. It updates a previous survey, Private Market Financing for Developing Countries (Washington: IMF, December 1991). Information on developments in the area of official bilateral debt is provided in Multilateral Official Rescheduling: Recent Experiences (Washington: IMF, forthcoming). A broader overview of progress under the debt strategy is provided in Clark, John, and Eliot Kalter, “Recent Innovations in Debt Restructuring,” Finance and Development (Washington: IMF and World Bank, September 1992). For background on the broader context of the financing activity of developing countries, see International Capital Markets: Developments, Prospects, and Policy Issues (Washington: IMF, September 1992).


See, for example, Marichal, Carlos, A Century of Debt Crisis in Latin America (Princeton: Princeton University Press, 1989), and Sachs, Jeffrey, ed., Developing Country Debt and the World Economy (Chicago: University of Chicago Press, 1989).


See Chapter V for information on characteristics of financing flows to market re-entrant countries, compared with the experience of 1978–82.

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