The survey discussed in chapter seven suggests that asset growth has been an important objective of international banks during the 1970's. The model of the supply of bank loans developed in chapter three suggests that this growth is not incompatible with growing profits. The greater inflow of funds to the euromarkets after 1973 enabled the banks to fund this objective at a faster rate. As the deposits were received in foreign currencies,• it was preferable to lend in the same currency so as to avoid exchange risk.
In addition, the increased liquidity of the eurocurrency market and the post 1974 portfolio adjustment of the US banks roughly coincided with a fall off in demand for bank loans by the corporate sector in the USA and Western Europe. It was therefore necessary to expand the already existing markets for LDC lending in order to achieve the growth and profits objectives.
The profitability of lending to LDCs depends upon the yield on the loan and the fees from any additional banking services that can be sold to the borrower. Many bankers see the lending process as merely a way of establishing new banker-customer relationships through which a whole variety of additional loan and non loan services can be sold to the customer.
The relative profitability of an individual loan may be approximated by the spread or margin on that loan. However, as shown in chapter four of this thesis, the spread or margin actually underestimates the profitability because front end fees are charged by the lenders.
Given this caveat, the following data from OECD Financial Market Trends shows that at least the lending to two major LDC borrowers, Brazil and Mexico, was more profitable than lending to an OECD country, France.
Table 1.22
Best loan conditions available to selected public sector borrowers (maturity and spread)
Brazil Mexico France
MAT SPD MAT SPD MAT SPD
1974 12 S/8-3/4 10 1/2 10 3/8-S/8 12 1/2-3/4 1975 7 1 3/4 5 1 1/2 5 1 1/4 1976 7 1 7/8 5 1 1/2 7 1-1 1/8 7 1 3/4 1977 5 1 7/8 5 1 1/2 5 5/8 8 2 1 /8 10 1 1/4-1 3/4 8 7/8-1 1978 10 1 8 3/4 10 1/2 12 1 1/4 10 7/8-1 15 1 1/2 1979 12 S/8-3/4 6 1/2 15 3/8-1/2 12 5/8
Source: OECD Financial Market Trends, February 1980, p98
Furthermore, the following data from the IBRD shows tha
borrowers p aid higher spreads and received higher maturities than France during the third and fourth quarters of 1979.
Table 1.23 Average spreads and maturities of euroloans to selected developing countries Average 1979 Spread Average 1979 Matu]
Countries III IV III IV
Algeria - 1.06 - 9.2 Argentina 0.78 0.76 11 . 6 10.4 Brazil 0 . 8 6 0.72 12.5 12.0 Chile 0.85 0.92 10.6 9.8 Colombia 0.73 1.25 10 . 0 10.0 Greece 0.55 0.51 10 . 0 10.2 Indonesia 0 . 6 8 - 10.0 - Ivory Coast 1.63 1.50 10 . 0 7.6 Korea, Republic of 0.70 0.69 9.2 9.6 Malaysia 1.00 - 6.4 - Mexico 0.73 0.69 9.3 8.8 Morocco 0.96 - 10.0 - Nigeria 1.01 1.00 7.8 8 . 0 Philippines 1.01 0.92 12.9 10.9 Portugal 0.79 0 . 8 8 9.5 8 . 8 Romania O'. 6 6 - 1 0 . 0 - Spain 0.78 0.75 . 9.5 9.6 Thailand 0.64 - 8 .6 - Venezuela 0.42 0.58 1.7 7.9 Yugoslavia 0.89 0.98 1 0 . 6 8 . 6
Source: IBRD Annual Report 1981, pl50
During the 1970's the loan loss record of loans to LDC governments was actually better than that on banks' OECD domestic lending. Even at the time of writing, with the recent increase in debt reschedulings, actual losses on LDC loans are small. Therefore, even if the larger spreads on LDC loans reflected greater perceived risk during the 1970's, this increased spread went straight to the profit and loss account as a credit item.
I b
Data on profits from non loan banking services are not available. However, responses to the survey analysed in chapter seven suggest that one of the objectives of lending to LDCs was the development of new banker-custoraer relationships where non loan services could be sold for a fee.
With regard to the perceived risk of lending to LDCs, some observers (Griffiths— Jones 1980, Mendelshon 1980) suggest that the increased commodity prices of the late 1960's and early 1970's enhanced the creditworthiness of the developing countries in the eyes of the international banks. This is difficult to prove given the subjectivity of the concept of creditworthiness, nevertheless figures below show an increase in the purchasing power of exports of food products and raw materials excluding fuel.
Table 1.24 Purchasing power of export revenue
Import Value of Exports Purchasing Power of Exports Price Index Food Raw Materials (export rev-rimport price index) 0-970=100) (ex fuel) Food Raw Materials (ex fuel)
1967 97 9.60 7.16 9.90 7.38 1969 93 10.52 8.59 11.31 9.23 1970 100 11.92 8.93 11.92 8.93 1971 108 1 2 .12 8.78 11.22 8. 1 2 1972 117 14.24 10.46 12.17 8.94 1973 146 18.96 14.96 12.98 10.25 *
Source: United Nations Statistical Yearbook 1981 p44 & 47 Figures in billions US $ FOB
With such increases in the purchasing power of export earnings by the developing countries, these countries would find it easier to service debt and therefore would be a better credit risk for the b a n k e r s .
The 1970 Annual Report of the World Bank noted on page 44 that much of the growth of the value of primary exports was due to higher prices. These higher prices were reflected in a continuation of improvement in the terms of trade for LDCs. This continuous improvement in the terms of
-J u l. f. ij . t u . h -
trade would have had a favourable impact upon bankers' assessment of credit risk. The way was therefore open for the developing countries to gain access to bank credit some time before the impact of the 1973 oil price rise.
However, the increase in oil prices would, ceteris paribus, increase the risk of lending to those countries. Two other factors which have reduced the risk of such lending are the techniques of lending by way of loan syndication and the roll-over nature of the loans.
The technique of loan syndication, where a syndicate of banks join together to fund a particular loan, allows each individual bank to achieve greater diversification of a given loan portfolio. Thus the individual bank's loan portfolio exhibits less risk for a given level of income.
The roll-over nature of the loan passes the interest rate risk to the borrower, thus enabling the bank to lend for long maturities while being able to change the interest rate charged to reflect fluctuations in money market r a t e s .
Both these techniques reduced the risks to individual banks of a portfolio of loans to LDCs and made it possible for the banks to provide loans of maturities which, it was hoped by all parties, would be long enough to finance the post 1973 adjustment and development of the borrowing countries. The progress of this development providing the wherewithal to service the debt.
A further factor in perception of risk has been the establishment of Consortium Banks in the 1960's and 70's. This spread the risk of lending amongst the members of the consortium and because some of the shareholders had specialist knowledge of lending to particular regions, they were better able to assess the risk of lending (Harwick 1974). A similar suggestion has been made by Fielke (op cit) in that US bank branching followed US direct investment abroad. The existence of bank branches in certain countries increased the information that the banks
received about those countries. It is therefore not surprising, given the dominance of US banks in the "early loan syndications, that countries with significant amounts of US direct investment received the lion's share of international bank loans.
The reasons for the willingness of banks to lend to the LDCs can therefore be explained by three factors:
1) The desire of the banks to expand during the 1970's, but at