Investors to boycott national bail-outs, bankers warn
By Joanne Gray, Washington
Amid signs that capital flows to emerging markets will remain modest in 1999, international bankers warn that private investors might stay away if they are forced to take part in country bail-outs.
The Institute of International Finance, which represents major banks and securities houses worldwide, is bristling at the attempts by the "official sector" to "bail in" private financiers into international financial rescues of the type that were implemented for Indonesia, Thailand and South Korea, Russia and Brazil.
IMF members are expected to agree on the use of clauses which force bond holders to share the spoils of litigation with other creditors, and which give a majority the right to alter bond repayment terms. These measures are opposed by bankers and could lead to higher yields on emerging market debt. But the changes are likely to be accepted by the IMF in discussions this week and form a key element of the official response to the crisis.
Changes to bond contracts that would make it easier for sovereign governments to reschedule their debt, would create "reverse moral hazard", said IIF managing director Mr Charles Dallara as those governments would then have less incentive to introduce "difficult" but necessary economic policies. The IIF is also fighting off an IMF proposal which would require compulsory sovereign debt rescheduling, arguing that this would discourage capital flows.
"The way forward particularly in times of crisis is case by case, country by country," said IIF chairman John Bond, who is chairman of HSBC Holdings. "Lenders now have a wide range of ways in which they can work with country authorities even in times of crisis. The best approaches are going to be the ones in which participation of the private sector is voluntary."
Signs that Pakistan would seek to reschedule its Eurobond payments had generated "broader concerns in the marketplace regarding Eurobonds," the IIF said in a statement. There are also hints that Romania may be forced to reschedule its debt. "Such concerns could have an impact on the perceived credit worthiness of other borrowers and there is a risk that the investor appetite for emerging market paper could be dampened as a result," the IIF said. The IIF said it might accept voluntary contractual amendments that would allow a qualified majority of bond-holders, such as 95 per cent to agree to a rescheduling.
"If it is done in the market, fine. We oppose imposition by the official sector," said Citigroup chairman Mr William Rhodes, a member of the IIF board.
Emerging markets have increasingly turned to the international debt markets to raise money. But because of the diversity of bond investors, it is hard to achieve the unanimity necessary to reschedule the debt in the event of a financial crisis.
The IMF and the US argue that this creates moral hazard because it always places bond-holders first in the queue to be repaid. The IMF backs UK-style bonds, which allow a "qualified majority" to initiate a rescheduling. Reflecting the caution now hanging over sovereign bonds, the IIF has estimated that net private capital flows to emerging markets will remain modest in 1999 at $US141 billion, down slightly from $143 billion in 1998, and $263 billion in 1997.
Foreign direct investment will remain the dominant portion of private capital flows to emerging economies, with $103 billion expected in 1999 down from $123 million in 1998, because investment in Brazil and China will moderate. Portfolio investment is projected to recover to $22 billion in 1999, from $2 billion in 1998. But private credit flows will continue at low levels, and are projected to be at $16 billion in 1999, down from $20 billion in 1998, $121 billion in 1997 and $$200 billion in 1996.