7:25 AM Feb 19, 1996


Geneva 19 Feb (Chakravarthi Raghavan) -- Thailand has emerged as the largest bank debtor (to banks in the BIS area), with a total bank debt of $82.3 billion, with 71% of this as short-term claims, according to the Bank of International Settlements (BIS), Basle which has just published its annual survey of international banking and financial market developments

South Korea, which was overtaken by Thailand, was second with a debt to banks of $79.3 billion and Mexico third with $70.8 billion.

According to the BIS, the most heavily indebted developing countries in the international securities markets end 1995 were South Korea ($26.5 billion), Mexico ($25.8 billion), Argentina ($21.1 billion), Brazil ($18.8 billion) and China, excluding the Hong Kong affiliates of Chinese entities ($12.3 billion)

The term international securities (in the BIS report) covers bonds, Euro-notes etc. It includes issue of such instruments by financial institutions as well as governments and state agencies and corporate entities.

International financial market activity remained on an upward trend in the last quarter of 1995, with a sustained pace of financing (syndicated loans, Euro-notes and international bonds) bringing the total net international securities issuance for the year to an unprecedented $327.7 billion or a 13% increase in total stock outstanding.

The BIS report notes that due to increasing perception of weaker economic growth in the main industrial countries and a favourable outlook for inflation led to a further easing of long-term interest rates in the latter part of 1995.

On the investment side, search for higher yields and differentiation of credit risk in an environment of declining interest rates was further intensified. On the borrowing side, the impact on issuance of better fiscal discipline by governments was more than offset by the strong fund-raising activity of financial institutions.

By the end of the year, bond yields in US dollar, Japanese yen and major European markets were back at or close to the levels prior to the global bond market reversals in early 1994. In the US lower inflation expectations were also reflected in a flattening of the yield curve, with real long term interest rates reaching their lowest level in a decade. But yield curves in Europe and Japan remained relatively steep as economic and political uncertainty overshadowed the medium term outlook.

There was an unprecedented volume (in 1995 as a whole) of international securities issued by banks and other financial institutions, in particular in Europe, and this was responsible for 60% of the total market growth.

But the fact that the international banking market was awash with liquidity -- as illustrated by the persistence of a borrowers' market in the syndicated loans sector, BIS says, suggests a shift away from traditional liabilities. The liberalisation of securities markets, such as in Japan and Germany,l and the increasing popularity of Euro-note facilities were major contributing factors.

After four years of lethargic growth, cross-border banking intermediation accelerated in 1995.

While supported by strong lending to Asian countries and, in the third quarter, by Japanese banks' funding of their foreign affiliates, the renewed expansion of banks' international on-balance-sheet transactions was also largely related to securities trading and lending.

This, BIS notes, is reflected partially and indirectly in the substantial amount of double-counting between banking and securities business. BIS estimates that of a total international financing of $146.6 billion in third quarter of 1995, no less than $31.6 billion is double-counting.

This double-counting had reached $122.6 billion out of a total of $402.6 billion in 1993, but was reduced to a figure of $66.3 billion in 1994 as a whole, collapsing in the last quarter of that year to $38.8 billion.

While there was some reduction in volume of exchange-traded derivatives transactions in North America and Europe from the record level of 1994, activity in over-the-counter (OTC) instruments showed no sign of abating, says BIS.

The BIS-coordinated central bank global survey of derivatives market activity (spring 1995) showed that the OTC market was larger than previously estimates and substantially bigger than exchange-based markets. This survey had found that the notional amounts of OTC contracts stood at $40.7 trillion at the end of March 1995.

The concentration of outside-area lending (by BIS to non-BIS area) by BIS area banks to Asia showed no sign of weakening in the third quarter of 1995. Asia accounted for 74% of total $28.4 billion of new lending by the reporting banks. This implied a further acceleration in the underlying trend from $68.8 billion in the 12 months ending June 1995 to $82 billion.

But credit to other regions remained very selective, the main recipients being a small group of outside-area developed countries, the Czech Republic and Brazil. The latter was in sharp contrast to two other major Latin American countries. Claims on Argentina stagnated and that on Mexico declined.

But the stagnation of bank lending to Argentina concealed the fact that the country had resumed borrowing on international securities market on a large scale, the BIS notes.

New lending to Brazil of $3.7 billion was accompanied by a further increase of $11 billion in deposits with reporting banks. Brazilian authorities continued to transfer official funds to commercial banks following the removal of legal uncertainties surrounding its external debt earlier in the year.

In Asia, Thailand once again emerged as the major recipient of funds, despite new restrictions by the authorities on local foreign currency lending. Thailand received a total of $13.4 billion of new credits from the reporting banks -- 64% of the total channelled to the region during the period. At the end of September, Thailand has overtaken South and Mexico as the largest bank debtor in the developing world, with a total of $82.2 billion (compared to $79.3 billion of South Korea and $70.8 billion of Mexico). Short-term claims represented 71% of the total banking claims reported against Thailand at mid-1995.

BIS suggests that a shift in financing in favour of the Bangkok International Banking Facility (set up in 1993) and competition between foreign banks to obtain local banking licences may have temporarily boosted credit lines to Thailand. Taiwan was the only other major borrower in the region to record a decline in the banking debt during the third quarter due to the political and financial uncertainties.

In terms of international securities (bonds, euro-notes etc), the BIS report says that heavy borrowing by developing countries entities has raised the total stock of international debt securities by this group of countries from a mere $33.7 billion at end-1990 to $138.9 billion at end of 1995 -- from a two percent of the total allocated by country to five percent.

While the Mexican financial crisis led to a drying up of new issues from developing countries in the first quarter of 1995 -- as was also the case for developed countries with large budget deficits or debt burdens -- issuance recovered rapidly in the subsequent quarters.

But since was greater reliance on Euro-note programmes, little is known about maturities and costs, though anecdotal evidence points to shortened maturities and higher margins, the BIS says.

The most heavily indebted developing countries in the international securities markets were South Korea, Mexico, Argentina, Brazil and China (excluding the Hong Kong affiliates of Chinese entities).