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This paper documents to what extent firms from developing countries borrow short versus long term, using data on corporate bond and syndicated loan markets. Contrary to claims in the literature based on firm balance sheets, firms from developing countries borrow through bonds and syndicated loans at maturities similar to those obtained by developed country firms. The composition and use of financing matters. Firms from developing countries borrow shorter term in domestic bond markets, but the differences in international issuances (accounting for most of the proceeds) are significantly smaller. Developing country firms borrow longer term in syndicated loan markets, which they partially use for infrastructure projects. However, only large firms from developing countries (similar in size to those from developed ones) issue bonds and syndicated loans. The short-termism in developing countries is partly explained by a lower proportion of firms using these markets, with more firms relying on other shorter-term instruments.
Capital Raising --- Corporate Bonds --- Developing Countries --- Domestic Debt --- Firm Financing --- International Debt --- Issuance Maturity --- Long-Term Debt --- Markets --- Short-Term Debt --- Syndicated Loans
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Short-term debt exposes firms to credit supply shocks and liquidity risk. Short-term debt can also reduce potential agency conflicts between managers and shareholders by exposing managers to more frequent monitoring by the market. This paper examines whether internal monitoring through independent boards and stronger shareholder protections can substitute for external monitoring through the use of short-term debt. The analysis finds that the relationship between debt maturity and governance depends on shareholder rights in a given country. In countries with stronger investor protection, governance and short-term debt act as substitutes. Instrumenting the institutional environment with legal origin confirms the results.
Agency Issue --- Board Independence --- Corporate Governance --- Debt Markets --- Finance and Financial Sector Development --- Financial Regulation and Supervision --- Governance --- Investor Protection --- Legal Origin --- Private Sector Development --- Shareholder Protection --- Short-Term Debt
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March 2000 - What can the international community do to prevent financial contagion? Chang and Majnoni try to identify and evaluate the public policy implications of financial contagion on the basis of a very simple model of financial crises. In this model, financial contagion can be driven by a combination of fundamentals and by self-fulfilling market expectations. The model allows the authors to identify different notions of contagion, especially the distinction between monsoonal effects, spillovers, and switchers between equilibria. They discuss both domestic and international policy options. Domestic policies, they say, should be aimed at reducing financial fragility - that is, reducing unnecessary short-term debt commitments. With explicit commitments, the maturity of external debts should be lengthened. With implicit commitments, such as private liability guarantees, they emphasize limiting or eliminating such guarantees, to improve an economy's international liquidity and reduce its exposure to contagion. Internationally, they stress the need for improving financial standards, which makes it easier to assess when a country is subject to different kinds of contagion. The effectiveness of international rescue packages depends on the kind of contagion to which a country is exposed. Implications: The international community should help those countries that are already helping themselves. This paper - a product of the Financial Sector Strategy and Policy Group - is part of a larger effort in the group to study the determinants and policy implications of international financial contagion. The author Giovanni Majnoni may be contacted at gmajnoni@worldbank.org.
Bankruptcy and Resolution of Financial Distress --- Currencies and Exchange Rates --- Currency --- Currency Crises --- Debt Markets --- Deposit Insurance --- Emerging Markets --- Exchange --- Exchange Rate --- External Debts --- Finance and Financial Sector Development --- Financial Contagion --- Financial Crises --- Financial Fragility --- Foreign Interest --- Guarantees --- Interest Rates --- International Financial Contagion --- International Investors --- Liability --- Liquidity --- Market --- Maturity --- Options --- Policy Responses --- Private Sector Development --- Short-Term Debt
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Mckenzie econometrically ascertains the determinants of default to the International Bank for Reconstruction and Development (IBRD) through panel logit analysis. Creditworthiness with a lag of one period is determined by the extent of arrears to private creditors, the proportion of total debt service that is being paid, the government budget deficit, the extent of military involvement in the government of a country, and by the G7's current account balance. Default to the IBRD falls into a graduated hierarchy, whereby default occurs first to Paris Club and commercial bank creditors, with subsequent default triggered by portfolios with high proportions of IBRD and short-term debt, as well as the factors mentioned above. Default to these other creditor groups can be explained by more traditional country risk variables, although Mckenzie's analysis highlights the importance of political and external factors in explaining default to all creditors studied. He finds sovereign default to be a state-dependent process, whereby the repayment behavior of a country changes once it enters into default. Operationally, Mckenzie arrives at a model that can be used to assess short-term creditworthiness, although data imperfections and availability still limit the usefulness of the model for some countries. Longer-term risk assessment proves more difficult, which raises operational questions for the IBRD. This paper-a product of the Credit Risk Division, Office of the Senior Vice President and Chief Financial Officer-is part of a larger effort in the Bank to monitor the creditworthiness of IBRD borrowers. The author may be contacted at mcken@stanford.edu.
Arrears --- Bank Creditors --- Bank Policy --- Borrowers --- Commercial Bank --- Country Risk --- Creditor --- Creditworthiness --- Debt Markets --- Debt Service --- Default --- Exchange --- Finance and Financial Sector Development --- Financial Literacy --- Government Budget --- Government Budget Defic International Bank --- Portfolio --- Private Creditors --- Repayment --- Short-Term Debt --- Sovereign Default --- Total Debt
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July 2000 - Many transport projects undertaken during the boom period of the 1990s came to a crashing halt in 1997, and conditions in emerging markets worsened in 1998 and 1999. Many projects failed, victim of everything from overoptimistic forecasts to excessive debt to an inability to refinance bridge loans. As available financing dried up, many projects went bankrupt, had to be renegotiated, or were taken over by the government. What have we learned from all this? Recent developments in emerging financial markets have dramatically changed the appetite for (and terms of) transport infrastructure projects. As a result of defaults in Asia and Russia and devaluations in Asia, Brazil, and Russia, political and currency and exchange risk premia have increased dramatically. Given large needs for sovereign debt financing, infrastructure project finance will be seeking guarantees at the same time as governments are issuing primary securities. Large portfolio outflows in emerging market funds mean that the sources of both equity and debt capital that became available in the mid-1990s are drying up for all but the most creditworthy projects. Moreover, real economic effects from financial events have consequences in the transport sector, since transport is a derived demand. Any decline in real economic activity is felt quickly in traffic levels and revenues. Currency devaluations that help spur exports may generate higher volumes for seaports and air cargo activity. These effects vary by sector, especially over the medium to longer term. Declines in real economic activity make matters especially difficult for toll roads, as drivers shift to free alternatives and reduce the number of trips taken. What does all this mean for project finance in transport? Risks have increased. Debt finance costs more. The available tenor of debt instruments has shortened and more equity is required for projects. The sources and availability of equity finance have changed. Project finance efforts have shifted from new projects to the privatization, rehabilitation, and expansion of existing facilities. And a superclass of sponsors, bankers, and investors has emerged. Failures and mistakes in project finance deals in the 1990s were sharp and persistent. But much has been learned about sound project economics, conservative financial structures, comprehensive sensitivity analysis, the effects of macroeconomic factors, and the need for proper incentives and sound institutional and regulatory arrangements. This paper-a product of Governance, Regulation, and Finance, World Bank Institute-is part of a larger effort in the institute to increase understanding of infrastructure regulation. The authors may be contacted at aestache@worldbank.org or jstrong@worldbank.org.
Bank Debt --- Banks and Banking Reform --- Bond --- Capital Structures --- Debt Markets --- Debt Servicing --- Emerging Bond Markets --- Emerging Markets --- Environment --- Environmental Economics and Policies --- Finance --- Finance and Financial Sector Development --- Financial Crises --- Financial Intermediation --- Financial Literacy --- Financial Performance --- Good --- Infrastructure Finance --- Interest --- Interest Rate --- Interest Rate Risk --- Investing --- Market --- Pension --- Pension Assets --- Private Sector Development --- Public Sector Economics and Finance --- Revenues --- Short-Term Debt --- Transport --- Transport Economics, Policy and Planning
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