AFR: Investors to boycott national bail-outs, bankers warn (fwd)

[Robert Weissman <rob@essential.org>]

Australian Financial Review
Tuesday, April 27, 1999
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.