IMF monitoring matters in vulnerable bond markets, says IMF working paper

By Reshmi Basu

New York, May 10 - International Monetary Fund monitoring and surveillance matter more in bond markets vulnerable to liquidity crises, according to an IMF working paper titled "The IMF in a World of Private Capital Markets."

The growth of bank loans and international capital bonds is an emerging trait seen over the last 15 years of international financial history, note the researchers, Barry Eichengreen of the University of California, Berkeley, Kenneth Kletzer of the University of California, Santa Cruz, and Ashoka Mody of the IMF, who are expressing their views, not official IMF policy.

Tapping bond markets holds advantages for investors, such as "greater scope for diversifying country risk," said the authors.

"Bank loans are easier to access for borrowers new to such markets, since banks have a comparative advantage in bridging information asymmetries," the authors said.

Through analysis of more than 6,700 loan transactions between borrowers and international bank syndicates and 3,500 new bonds issued between 1991 and 2002, the authors analyze the frequency of transactions and the spreads charged.

The authors find that repeat borrowing is more important in reducing the costs of borrowing from bank syndicates than bond markets.

"But spreads on bonds are lower when they are issued in conjunction with IMF-supported program," wrote the authors.

As borrowers return for credit, they reveal information about themselves, said the authors.

"In contrast, public monitoring through IMF-supported programs has a larger impact on spreads in markets dominated by bonds than bank loans," according to the paper.

But the authors noted that the IMF's presence and lending have different effects on countries depending on the situation.

For instance, in countries with external debt/GDP ratios below 60%, the IMF's presence helps determine bond access, reaching a maximum at 40%, a level the researchers said is where a country is vulnerable to liquidity shocks. The impact of the IMF presence disappears when debt reaches 70% of GDP.

"Moreover, there is little evidence in this high debt range that additional IMF lending reduces spreads and enhances market access," the authors find.

"Evidently, countries with such high debts have deep structural problems that must be solved before IMF intervention can catalyze external finance."

The paper also confirms that IMF supported programs do more to facilitate bond issuance than lending.

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