CHAPTER 13
INTERNATIONAL BANKING, DEBT, AND RISK
CHAPTER OUTLINE
Reasons for Offshore Banking
LIBOR Interest Rate Spreads and Risk
International Banking Facilities
Offshore Banking Practices
International Lending and Crisis
IMF Conditionality
The Role of Corruption
Country Risk Analysis
Summary
Exercises
References
LECTURE HINTS
1.
World Financial Markets by Morgan Guaranty Trust Co. and Euromoney magazine contain many
articles of interest to this chapter along with related data. Topics covered vary from month to month,
but a took at recent issues in the library is sure to turn several interesting pieces of recent news to
spice up the lecture.
2.
The IMF Survey contains timely information on recent financing agreements between the IMF and
individual nations.
3.
Euromoney magazine publishes a ranking of countries by credit worthiness which can be compared to
the rankings published in Institutional Investor. Current rankings can be compared to these in Table 13.6
to examine how country status has changed.
SUGGESTED ANSWERS TO CHAPTER 13 EXERCISES
Exercise 1
Eurocurrency transactions are considered to be riskier than are domestic currency transactions.
Therefore, if the Eurodeposit rate fell below the domestic deposit rate, Eurobanks would have no
Eurocurrency deposits. On the other hand, any Eurobank charging more than the domestic loan rate
would find the demand for its loans falling to zero. Since the Eurocurrency markets are largely
unregulated and there is an additional risk in international transactions in that investment funds are
subject to control by the country of currency denomination as well as the country of the deposit
bank, Eurobanks must be able to offer narrower spreads than domestic banks to stay in business.
Exercise 2
Total deposits in Eurobanks give the gross size of the market. To find the net size of the market we
subtract interbank deposits from the gross size of the market. To see how to use T accounts to
explain the difference between the gross and net size of the Eurocurrency market, refer to tables
13.1 through 13.3 in the text.
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Exercise 3
The IMF loans come with conditions imposed on the borrowing country’s economic policies to
improve the chance for debt repayment. The debtor country would prefer a bank loan with no
conditionality than the IMF loan with conditionality, other things equal. But “other things” can
never be equal between commercial bank and IMF loans. The view of the IMF is that adjustment
programs are unavoidable in debtor countries facing repayment difficulties. The adjustments
required are those to promote long-run growth and thus allow debt repayment. Since the IMF is not
a profit-making institution, IMF loans may be offered at more favorable terms than bank loans.
Also, the IMF may lend to a country that is too poor a credit risk for banks.
Exercise 5
External shocks, like competitive devaluations and falling semiconductor prices, reduced exports
and national income so that bankruptcies and loan defaults became more common. Domestic
macroeconomic policy that fixed exchange rates became unsustainable once domestic financial
problems were apparent. Speculation only worsened the pressure for devaluation. Once the
devaluation occurred, foreign currency loan repayment became more costly. Loans in domestic
banks were frequently made on the basis of how well-connected politically the borrower was rather
than true prospects for repayment. Once incomes started falling, many such loans were in default.
A moral hazard was created by the government implicit loan guarantees. This encouraged excessive
risk taking by banks.
Exercise 7
Consider the following when evaluating a loan: debt/GDP, international reserves, exports, percapita
real GDP growth, and political environment.
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