## 1.   Trends in International Bond and Bank Lending

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---

### I. INTRODUCTION
- IMF objectives since at least the 1990s include catalyzing and helping to avoid instability in private capital flows to emerging markets.
- IMF roles emphasized:
  - public monitoring services and negotiated programs that enable borrowers to reveal commitment to sound macroeconomic policies;
  - bridge finance in liquidity crises.
- Analytical focus and empirical base:
  - Effects of IMF-supported programs on market access and cost of funds.
  - Empirical dataset: more than 6,700 loan transactions (LIBOR–based syndicated loans) and some 3,500–3,700 bond issues placed between 1991 and 2002.
  - Explanatory variables include a measure of repeat borrowing that proxies creditor learning and the existence and size of IMF–supported programs.
- Key empirical patterns:
  - Repeat borrowing reduces costs more for bank syndicates than for bond markets.
  - Public monitoring through IMF–supported programs has a larger impact on spreads in markets dominated by bonds than bank loans.
  - For countries with external debt/GDP ratios below 60 percent, IMF presence (distinct from IMF lending) matters for bond market access; the impact diminishes as debt rises and disappears when debt reaches 70 percent of GDP.
  - For very high debt levels, IMF presence or additional IMF lending does not significantly enhance market access; only programs that turn precautionary significantly lower borrowing costs at high debt levels.

### II. THEORETICAL BACKGROUND
- Framework draws on sovereign-default and renegotiation models (Eaton and Gersovitz (1981), Bulow and Rogoff (1989), Kletzer and Wright (2000), Tirole (2002)).
- Core logic:
  - Debtor fundamentals y determine willingness/ability to repay; if outstanding debt D exceeds V(y) debtor seeks renegotiation.
  - Under asymmetric information, creditor monitoring matters especially when restructuring is likely.
- Monitoring and coordination implications:
  - Repeat lending (learning) should reduce spreads.
  - IMF monitoring/commitment can similarly reduce spreads and increase issuance when renegotiation risk exists.
  - Banks may have coordination advantages in rescheduling that can capture value versus bondholders; IMF support can reduce banks’ first-mover advantage.
- Liquidity-crisis interpretation (adapted from Morris and Shin (2003)):
  - Private-information-driven coordination failures can cause liquidity crises even when V(y) exceeds total debt.
  - Banks’ ability to coordinate may mitigate crises; IMF programs should raise bond issuance relative to bank lending for countries susceptible to liquidity-driven crises.
  - Bank loans and bond issues may be negatively correlated if crises are caused by illiquidity.

### III. THE SETTING (empirical data characteristics)
- Aggregate magnitudes (1991–2002):
  - Credit obtained via banks and bonds were each just under $700 billion.
- Data construction:
  - Loan sample: 6,747 syndicated loan transactions between 1991 and 2002 (Loanware).
  - Bond sample: just over 3,700 bonds issued in same period (Bondware); spreads available for about 3,500.
  - On average, a bond issue was about 70 percent larger than a loan transaction.
- Repeat borrowing measure R:
  - Starts at 1 for first international debt contract from January 1, 1991, increments with each subsequent borrowing.
  - Medians and percentiles:
    - Bonds: median 3; 75th percentile 8; 90th percentile 27.
    - Banks: median 2; 75th percentile 4; 90th percentile 8.
- IMF program incidence:
  - About 22 percent of loans were contracted when a country had a Fund program in place.
  - Just over a third of bonds were issued in the presence of a program.
  - Under an IMF program, countries were about as likely to borrow through a loan or a bond; when there was no program, a loan was more than twice as likely as a bond.
- Debt/GDP stratification (transaction patterns):
  - Debt/GDP < 30 percent: few bond or loan transactions while under IMF programs.
  - Debt/GDP 30–40 percent: more borrowing under IMF programs, especially through bonds; total contracts higher without programs.
  - Debt/GDP 40–60 percent: distribution between program and no-program borrowing more even; more bonds issued under a program than when there is no program.
  - External debt > 60 percent of GDP: countries limit international borrowing; when they borrow, loans and bonds are equally prevalent.

### IV. PATTERNS OF BORROWING (econometric insights)
- Empirical methodology:
  - First-stage probit: correlates of borrowing by sovereign, non-sovereign/public, and private entities in each country-quarter.
  - Second-stage probit: likelihood of bond issuance rather than a bank transaction.
  - Effects reported as changes in probability for infinitesimal changes in continuous variables at means and discrete changes for dummies; standard errors clustered.
  - Explanatory variables: issuer type, global variables (U.S. growth, swap rate, EMBI volatility), country characteristics, repeat borrowing R, IMF program indicators.
- Global variables and borrowing:
  - Mean of average monthly growth of U.S. industrial production stated as 0.3 percent.
  - "0.4 percent, the probability of borrowing increases by just over one percent."
  - Higher U.S. growth facilitates borrowing, especially by bond issuers in the medium-debt range (debt/GDP 40–60 percent).
- Bond-market volatility:
  - If daily volatility increases from its monthly mean of 2 percent to 3 percent, the probability of borrowing declines by 1½ to 2 percent.
  - A one percentage point increase in daily volatility reduces the likelihood of bond issuance relative to a bank transaction by 2½-4 percent for borrowers from countries with debt/GDP ratios below 60 percent.
- Credit quality, debt ratios, and borrowing behavior:
  - Institutional Investor credit ratings run from 0 to 100.
  - An increase in rating by 10 points from a mean of 52 raises the likelihood of borrowing: "The likelihood of borrowing rises by between 16 and 25 percent."
  - Debt service to exports ratio raises likelihood of borrowing provided debt/GDP < 60 percent.
  - Higher export volatility reduces likelihood of borrowing abroad, particularly reducing bond-market borrowing.
- Maturities:
  - Average maturity of loans: 4½ years (median just over 3 years).
  - Average maturity of bonds: 6¼ years (median 5 years).
  - A borrower wishing to increase maturity from the average bank loan to the average bond maturity is about 3.5 percent (1.75*0.02) more likely to issue a bond.

### Pricing of loans and bonds — empirical framework and determinants
- Empirical model (Heckman-style sample selection):
  - log (spread) = βX + u1
  - Selection equation: latent issuance threshold B' = γZ + u2
  - Assumptions: u1 ~ N(0,σ), u2 ~ N(0,1), corr(u1, u2) = ρ; equations estimated by maximum likelihood.
- Variables in spreads equation:
  - Transaction-specific: maturity, amount, currency, production sector, and log of Repeat Borrowing R.
  - Selection equation includes global and country variables and the ratio of debt service to exports (influences issuance decision but not spreads).
- Global growth and spreads:
  - A 1.2 percent increase in annual growth reduces loan spreads in the mid-debt range by 2 percent and bond spreads in that same range by about 4 percent.
- EMBI volatility effects:
  - If daily volatility rises by one percent (at the daily mean of 2 percent), bond issuances fall by between 5 and 7 percent for countries with debt/GDP below 60 percent.
- Credit-rating effects on spreads:
  - A 10-point improvement in Institutional Investor rating lowers spreads: 32 percent for loans and 48 percent for bonds (largest effect in the mid-debt range).

### Key empirical findings
- Repeat borrowing versus IMF programs:
  - Repeat borrowing significantly reduces spreads on syndicated loans; log of repeat bank borrowing coefficients reported as -0.139 (Low), -0.149 (Medium), -0.142 (High) — all significant.
  - A second loan reduces spreads by about 10 percent; a third loan has a spread about 6 percent lower than the second loan; effect declines thereafter.
  - In bond markets, repeat issuance lowers spreads only for lightly indebted countries (10–30 percent debt/GDP) and may raise spreads in higher ranges.
  - IMF programs reduce spreads and enhance access mainly in bond markets, especially for medium-debt countries (debt/GDP 40–60 percent):
    - Bond issuance about 13 percent higher when there is a Fund program and spreads are 40 percent lower in this range.
  - IMF programs facilitate bank borrowing in the medium-debt range but impact on loan spreads is insignificant.
  - In the low-debt range (below 30 percent), countries with IMF programs borrow little; negotiating a program appears associated with unobserved characteristics that raise spreads rather than lower them.
- Sensitivity and extensions:
  - Overlapping debt/GDP intervals (10–30 up to 60–80) show:
    - Loans: repeat borrowing significant in all 6 intervals; value of repeat borrowing greater for loans than bonds in every debt category.
    - IMF programs: do not reduce loan spreads significantly and are associated with higher loan spreads until debt/GDP between 40 and 50 percent; for debt/GDP above 50 percent, IMF programs associated with higher frequency of bank borrowing without apparent adverse effect on spreads.
    - Bonds: repeated issuance lowers spreads only in the 10–30 percent range; IMF programs strengthen spread-reducing effect approaching 40–60 percent; beyond that influence weakens.
- Does the amount of IMF lending matter?
  - Table 6 coefficients (IMF Amount/Debt):
    - Loans: 2.941 (Low), 6.922 (Medium), 1.801 (High).
    - Bonds: 0.386 (Low), 4.357 (Medium), 0.033 (High).
  - Conclusion: amount of IMF lending does not influence bond spreads (consistent with Fund as monitor rather than liquidity provider); larger IMF assistance associated with higher loan spreads in low-debt categories (availability of additional IMF resources allows additional borrowing but appears to eliminate creditor coordination advantage).
- Precautionary programs:
  - Programs designated precautionary at outset: borrowing via both loans and bonds is lower, mainly for countries in the intermediate debt range.
  - Programs that turn precautionary (member stops drawing but pays commitment fee to retain access): aggregate borrowing does not appear to be affected, but spreads tend to fall—largest effect in high-debt zone; both banks and bond markets enjoy lower spreads when a program turns precautionary, with larger impact in bond markets.
  - These patterns emphasize the Fund relationship (monitoring/signaling) rather than the amount lent.
- Private versus public borrowers:
  - Repeat borrowing reduces spreads more strongly for bank loans than bonds irrespective of borrower sector; effect larger for private-sector borrowers.
  - A second loan reduces spreads charged private bank borrowers by about 13 percent; public borrowers achieve on average a 7 percent spread reduction.
  - In bond markets, private borrowers gain most from IMF programs in the intermediate debt category: a Fund program reduces bond spreads for private borrowers in this zone by 47 percent while raising the probability of bond issuance by 27 percent.
  - Public borrowers face rising bond spreads as they borrow more, suggesting coordination effects dominate information gains.
- Representative regression magnitudes (examples):
  - Loans (Table 4 spread equation): Log of Repeat Borrowing coefficients: -0.139 (Low), -0.149 (Medium), -0.142 (High).
  - Bonds (Table 4 spread equation): Log of Repeat Borrowing coefficients: -0.038 (Low), 0.047 (Medium), 0.015 (High).
  - Table 5A (Loans by overlapping debt ranges): IMF Program spread coefficients: 0.561, 0.230, 0.272, -0.041, -0.091, -0.081 for ranges 10-30, 20-40, 30-50, 40-60, 50-70, 60-80; Repeat Borrowing spread coefficients: -0.174, -0.090, -0.058, -0.149, -0.159, -0.146.
  - Table 5B (Bonds by overlapping debt ranges): IMF Program spread coefficients: 0.034, -0.000, -0.043, -0.392, -0.252, -0.023 for ranges 10-30, 20-40, 30-50, 40-60, 50-70, 60-80; Repeat Borrowing spread coefficients: -0.067, -0.022, -0.004, 0.047, 0.067, 0.013.
  - Table 7A/7B (Precautionary programs): Precautionary Program spread coefficients for loans and bonds vary by debt range; examples include Bank loans — Precautionary Program coefficient -0.533 in 20-40 range.
  - Table 8 (Private vs Public borrowers): Private borrowers — Log of Repeat Borrowing coefficients (Loans): -0.133, -0.179, -0.179 (Low, Medium, High); IMF Program reduces bond spreads for private borrowers in the medium debt zone with an interaction coefficient of -0.466 for bonds (medium) in Panel A.
- Interpretation and policy implications:
  - Distinguish markets by instrument and intermediary: bank loans and bonds respond differently to information revelation (repeat borrowing) and to IMF monitoring/signaling.
  - Banks have comparative advantage in bridging information asymmetries through repeated lending; repeat transactions convey borrower information, reducing loan risk premia.
  - IMF monitoring and surveillance matter more in bond markets, with greatest impact when debt reaches 40 percent of GDP (countries vulnerable to liquidity shocks).
  - As indebtedness rises beyond intermediate levels, the monitoring impact of the IMF on spreads declines; liquidity provision (amount lent) matters less than the signaling/monitoring relationship except where insolvency risk is severe.
  - Precautionary program implementation and persistence of a Fund relationship can improve market access (spread reductions), particularly for high-debt countries when programs turn precautionary.

### APPENDIX I — Data
- Bond dataset coverage and characteristics:
  - Period: 1991 to 2002.
  - Included bond-level variables: launch spreads over risk-free rates (basis points), amount of the issue (millions of US$), maturity (years), borrower type (sovereign, other public sector entity, or private debtor), currency, fixed or floating rate, borrower’s industrial sector (manufacturing, financial services, utility or infrastructure, other services, or government).
- Global variables:
  - U.S. industrial production growth rate: average of month-month growth rate over a quarter.
  - U.S. ten-year swap spread.
  - EMBI: standard deviation of difference in log of daily spreads.
- Country characteristics (examples of variables, units, periodicity, sources):
  - Total external debt (EDT): Unit US$, Annual, Source: WEO, Series: D.
  - Gross national product (GNP, current prices): Unit US$, Annual, Source: WEO, Series: NGDPD.
  - Total debt service (TDS): Unit US$, Annual, Source: WEO, Series: DS.
  - Exports (XGS): Unit US$, Annual, Source: WEO, Series: BX.
  - Reserves (RESIMF): Unit US$, Quarterly, Source: IFS, Series: q#c|_1l_dzf.
  - Short-term bank debt (BISSHT): Unit US$, Semi-annual, Source: BIS.
  - Credit rating (CRTG): Scale, Semi-annual, Source: Institutional Investor.
- Constructed variables:
  - Debt/GNP: EDT/GNP.
  - Debt service/exports: TDS/XGS.
  - GDP/growth: 0.25*ln[GDP90_t/GDP90_{t-1}].
  - Standard deviation of export growth: standard deviation of monthly growth rates of exports (over six months).
  - Reserves/imports: RESIMF/IMP.
  - Reserves/GNP: RESIMF/GNP.
  - Reserves/short-term debt: RESIMF/BISSHT.
  - Short-term debt/total debt: BISSHT/BISTOT.
  - Domestic credit/GDP: CLM_PVT/(GDPNC/4).
- Data sources and completion of missing data:
  - Primary sources: IMF’s World Economic Outlook (WEO) and International Financial Statistics (IFS); IMF program data from IMF Executive Board Documents and Staff Estimates; World Bank’s World Debt Tables (WDT) and Global Development Finance (GDF); BIS data on international bank lending.
  - Credit ratings from Institutional Investor.
  - Missing data completed using the US State Department's Annual Country reports on Economic Policy and Trade Practices.
  - U.S. industrial production from the Federal Reserve; swap rates and EMBI from Bloomberg.

*IMF working paper (extracted content unit).*

### 1.   Trends in International Bond and Bank Lending.........................................................21

### 1.   Trends in International Bond and Bank Lending.........................................................21

### 2. Number of Transactions, by Debt Category and IMF Program...................................22
- Section enumerates "Number of Transactions" broken down by "Debt Category" and "IMF Program".
- Page reference: 22

### 3. The Decision to Borrow and the Choice between Bonds and Loans...........................23
- Section addresses "The Decision to Borrow" and the comparative "Choice between Bonds and Loans".
- Page reference: 23

### 4. Pricing of Loans and Bonds .........................................................................................24 
- Section focuses on "Pricing of Loans and Bonds".
- Page reference: 24

### 5A. Loans: Impact of IMF Programs and Repeat Borrowing.............................................26 
- Subsection 5A analyzes "Loans" with emphasis on "Impact of IMF Programs and Repeat Borrowing".
- Page reference: 26

### 5B. Bonds: Impact of IMF Programs and Repeat Borrowing ............................................26
- Subsection 5B analyzes "Bonds" with emphasis on "Impact of IMF Programs and Repeat Borrowing".
- Page reference: 26

### 6. Does the Amount of IMF Lending Matter? .................................................................27 
- Section poses the question "Does the Amount of IMF Lending Matter?".
- Page reference: 27

### 7A. Bank Loans: Is Precaution Valuable? ..........................................................................28 
- Subsection 7A examines "Bank Loans" and asks "Is Precaution Valuable?".
- Page reference: 28

### 7B. Bonds: Is Precaution Valuable? ...................................................................................28
- Subsection 7B examines "Bonds" and asks "Is Precaution Valuable?".
- Page reference: 28

### 8. Do Private Borroweres Benefit More Than Public Borrowers from IMF   
Programs? ....................................................................................................................29
- Section investigates whether "Private Borroweres Benefit More Than Public Borrowers from IMF Programs".
- Page reference: 29

### Appendix I.          Data          ............................ .................................................................................................30
- Appendix I is titled "Data".
- Page reference: 30

*Source: _wp0584 - 1.   Trends in International Bond and Bank Lending.........................................................21*

### References .............................................................................................................

### _wp0584 - References

### I. INTRODUCTION
- IMF objectives since at least the 1990s include catalyzing and helping to avoid instability in private capital flows to emerging markets.
- The IMF provides public monitoring services and negotiates programs that enable borrowers to reveal commitment to sound macroeconomic policies; IMF lending can provide bridge finance in liquidity crises.
- Analytical focus: effects of IMF-supported programs on market access and the cost of funds, using three insights:
  - If banks engage in monitoring as part of normal operation, IMF monitoring should have a relatively limited impact when bank syndicates do the lending.
  - Private capital flows should be particularly sensitive to the magnitude of IMF financial commitments when the likelihood of debt restructuring is high.
  - Precautionary programs are a mechanism for governments to signal commitment to strong policies; differences between precautionary and regular programs help distinguish IMF monitoring versus lending roles.
- Empirical base: more than 6,700 loan transactions between emerging market borrowers and international bank syndicates and some 3,500 new bond issues placed between 1991 and 2002. Analysis covers transaction frequency and spreads; explanatory variables include:
  - a measure of repeat borrowing that proxies for creditor learning about borrower characteristics; and
  - the existence and size of IMF–supported programs.
- Key empirical patterns summarized:
  - Repeat borrowing reduces costs more for bank syndicates than for bond markets.
  - Public monitoring through IMF–supported programs has a larger impact on spreads in markets dominated by bonds than bank loans.
  - For countries with external debt/GDP ratios below 60 percent, IMF presence (distinct from IMF lending) matters for bond market access; the impact diminishes as debt rises and disappears when debt reaches 70 percent of GDP.
  - For very high debt levels, IMF presence or additional IMF lending does not significantly enhance market access; only programs that turn precautionary significantly lower borrowing costs at high debt levels.

### II. THEORETICAL BACKGROUND
- Framework: sovereign default, renegotiation, and endogenous liquidity problems following Eaton and Gersovitz (1981), Bulow and Rogoff (1989), Kletzer and Wright (2000), with reference to Tirole (2002).
- Core logic:
  - Country fundamentals and government policies determine ability/willingness to service debt; probability of default rises after a threshold debt level, leading spreads to rise.
  - Under asymmetric information, creditors’ ability to monitor debtors affects market outcomes; monitoring matters especially when debt restructuring can occur (high debt/low credit rating).
  - Creditors with monitoring advantage will lend where return to monitoring is high.
- Key model elements and expressions:
  - Debtor’s willingness to repay in expected present value: V(y), increasing in fundamental y. If outstanding debt D exceeds V(y), debtor will seek renegotiation.
  - Repeated borrowing willingness to pay: (1) ()() 1 1 1 + + + = tttt VE r ywyV, where ()t yw indicates debtor’s equilibrium willingness to service debt today and 1+t V measures solvency.
  - Expected net return to creditors: (2) ()()()()()()( ) ttttttttt DrDyVDDyVDyVVEER+−>+≤≤=1PrPr:, where r is return on alternative investments; interest spread is tt DER/ minus (1+r).
  - With information asymmetry, lenders know only an interval []()() tt yVyV and debtor may offer repayment ()t yVˆ; probability of default is higher and expected creditor returns are lower.
- Monitoring implications:
  - Repeat lending (learning) should reduce spreads; IMF advantage in monitoring or commitment can similarly reduce spreads and increase issuance when renegotiation risk exists.
  - IMF programs that become precautionary (no draws but monitoring retained) signal diminished need for official finance and commitment to prudent policies, reducing spreads.
- Creditor coordination and strategic bank behavior:
  - Banks can coordinate to reschedule and roll over loans, potentially capturing a strategic advantage at bondholders’ expense if they can reschedule a sufficient share of debt (equations (3)–(6) illustrate the mechanics and incentives for banks to choose r' to maximize expected returns in presence of rescheduling).
  - IMF official-sector support can reduce banks’ first-mover advantage by reducing renegotiation/default risk; absent market differences, IMF monitoring and lending would reduce both bond and bank loan spreads equivalently, but if banks have monitoring/coordination advantages, IMF actions can benefit bondholders relatively more.
- Liquidity-crisis interpretation (Morris and Shin (2003) framework, adapted):
  - If current liquid resources fall short of payments despite V(y) exceeding total debt, private-information-driven coordination failures can cause liquidity crises where bondholders refuse to purchase new issues.
  - Banks, able to coordinate, can replace maturing bonds with new loans and thus mitigate crises; IMF programs should raise bond issuance relative to bank lending for countries susceptible to liquidity-driven crises.
  - Implication: bank loans and bond issues may be negatively correlated if crises are caused by illiquidity.

### III. THE SETTING (empirical data characteristics)
- Historical context: between 1991 and 2002, credit obtained via banks and bonds were of about the same order of magnitude, just under $700 billion through each channel.
- Data construction:
  - Loan sample: 6,747 LIBOR–based syndicated loan transactions between 1991 and 2002 (Loanware).
  - Bond sample: just over 3,700 bonds issued in same period (Bondware); spreads available for about 3,500.
  - On average, a bond issue was about 70 percent larger than a loan transaction.
- Repeat borrowing measure R:
  - Starts at 1 for first international debt contract from January 1, 1991, and increments with each subsequent borrowing.
  - Medians and percentiles:
    - Bonds: median number of borrowings over 1991–2002 is 3; 75th percentile is 8; 90th percentile is 27.
    - Banks: median is 2; 75th percentile is 4; 90th percentile is 8.
  - Interpretation: bond market caters to borrowers with name recognition who return frequently; banks serve a more diverse set of clients who borrow episodically.
- IMF program incidence:
  - About 22 percent of loans were contracted when a country had a Fund program in place.
  - Just over a third of bonds were issued in the presence of a program.
  - Thus, under an IMF program, countries were about as likely to borrow through a loan or a bond; when there was no program, a loan was more than twice as likely as a bond.
- Debt/GDP stratification:
  - Countries with external-debt-to-GDP ratios below 30 percent had few bond or loan transactions while under IMF programs.
  - Debt/GDP between 30 and 40 percent: more borrowing under IMF programs, especially through bonds, but total contracts higher without programs.
  - Debt/GDP in 40–60 percent range: distribution between program and no-program borrowing more even; more bonds are issued under a program than when there is no program.
  - External debt exceeding 60 percent of GDP: countries limit international borrowing; when they borrow, loans and bonds are equally prevalent.

### IV. PATTERNS OF BORROWING (econometric insights)
- Empirical approach:
  - First-stage probit estimates correlates of borrowing by sovereign, non-sovereign/public, and private entities in each country-quarter.
  - Second-stage probit estimates likelihood of bond issuance rather than a bank transaction.
  - Reported effects: change in probability for infinitesimal changes in continuous independent variables at means, and discrete changes for dummy variables; standard errors adjusted for clustering.
  - Explanatory variables include issuer characteristics (borrower type with sovereign omitted), global variables (U.S. growth, the swap rate, EMBI volatility), and country characteristics.
- Global variable effects (high-level preview in text):
  - U.S. growth facilitates borrowing, especially by bond issuers in the medium-debt range (debt/GDP between 40 and 60 percent).
  - Example numeric context: the mean of average monthly growth of U.S. industrial production is stated as 0.3 percent (further marginal effects not reproduced in supplied content).

*Source: _wp0584 - References .............................................................................................................*

### 0.4 percent, the probability of borrowing increases by just over one percent.

### _wp0584 - 0.4 percent, the probability of borrowing increases by just over one percent.

### Effects of bond-market volatility and composition of external borrowing
- Higher volatility of J.P. Morgan’s Emerging Market Bond Index is associated with reduced borrowing.
  - If daily volatility increases from its monthly mean of 2 percent to 3 percent, the probability of borrowing declines by 1½ to 2 percent.
- Higher bond-market volatility lowers the frequency of bond issuance relative to bank loans for borrowers from countries with debt/GDP ratios below 60 percent.
  - A one percentage point increase in daily volatility reduces the likelihood of bond issuance relative to a bank transaction by 2½-4 percent.
- Interpretation offered:
  - Short-run liquidity concerns and financial market disorder generate strategic uncertainty among bondholders, who may withdraw to the sidelines.
  - Banks are more likely to continue lending because they are better able to coordinate among themselves.

### Credit quality, debt ratios, and borrowing behavior
- Improved credit quality (Institutional Investor credit ratings run from 0 to 100) increases borrowing from both banks and bond markets.
  - The importance of the credit rating increases when the external-debt/GDP ratio exceeds 40 percent.
  - An increase in rating by 10 points from a mean of 52 strongly raises the likelihood of borrowing (the text notes: "The likelihood of borrowing rises by between 16 and 25 percent").
- Debt service and export volatility effects:
  - A higher ratio of debt service to exports increases the demand for external resources, raising the likelihood of international borrowing, provided that the debt/GDP ratio is below 60 percent.
  - As the debt/GDP ratio rises, the demand for external borrowing is increasingly met through loans.
  - Higher export volatility reduces the likelihood of borrowing abroad, particularly reducing bond-market borrowing.
- Bond issuance characteristics:
  - Average maturity of loans in the sample is 4½ years (median just over 3 years).
  - Average maturity of bonds is 6¼ years (median 5 years).
  - A borrower wishing to increase the length of maturity from the average bank loan to the average bond maturity is about 3.5 percent (1.75*0.02) more likely to issue a bond.

### IMF programs and precautionary arrangements
- IMF programs and aggregate borrowing:
  - IMF programs have limited influence on aggregate borrowing by countries at low debt levels.
  - In the medium-debt range, a Fund program raises the probability of borrowing by 14 percent.
  - At high debt levels, the influence of IMF programs remains positive but is not statistically significant.
- Precautionary programs:
  - Case 1 — programs designated as precautionary at outset (country declares it does not intend to draw on resources):
    - Borrowing via both loans and bonds is lower in such cases, mainly for countries in the intermediate debt range.
    - Suggests countries approaching the Fund for precautionary reasons behave conservatively in borrowing.
  - Case 2 — programs that turn precautionary (member stops drawing but continues to pay the commitment fee to retain access):
    - Aggregate borrowing does not appear to be affected by such arrangements.
- Additional note:
  - Where debt ratios are higher, compositional shifts away from bond issuance are not statistically significant.

### Pricing of loans and bonds — empirical framework and determinants
- Empirical model for spreads (based on Eichengreen and Mody (2000, 2001) and extended by Mody and Saravia (2003)):
  - log (spread) = βX + u1
    - Dependent variable: logarithm of the spread.
    - X: vector of issue, issuer, and period characteristics, including IMF program dummy, program characteristics, and interactions.
  - Sample selection correction (Heckman-style):
    - Spreads observed when latent variable B crosses threshold B' = γZ + u2.
    - Assumptions: u1 ~ N(0,σ), u2 ~ N(0,1), corr(u1, u2) = ρ.
    - Equations (1) and (2) estimated simultaneously by maximum likelihood.
- Selection and spread equations:
  - Selection equation (issuance decision probit) includes global and country variables from Table 3 and the ratio of debt service to exports (appears to influence issuance decision but not spreads).
  - Spreads equation includes transaction-specific variables: maturity, amount, currency of issue, production sector of issuer, and the measure of repeat borrowing R (proxy for private monitoring).
  - R is included only in the spreads equation; larger R may decrease incremental information and increase coordination problems in restructuring.
- Empirical findings noted in text:
  - U.S. growth is associated with lower spreads and raises the likelihood of borrowing through banks and bond markets.
  - Effects of stronger global growth and export opportunities are especially important for the middle debt group.
  - An increase in monthly U.S. growth rate of 0.1 percent (context truncated in source) is associated with effects reported for the middle debt group.

*Source: _wp0584 - 0.4 percent, the probability of borrowing increases by just over one percent.*

### 1.2 percent increase in annual growth) reduces loan spreads in the mid-debt range by

### _wp0584 - 1.2 percent increase in annual growth) reduces loan spreads in the mid-debt range by

### Key empirical findings
- A 1.2 percent increase in annual growth reduces loan spreads in the mid-debt range by 2 percent and bond spreads in that same range by about 4 percent.
- An increase in EMBI volatility has a large effect on bond issuance for countries with debt/GDP below 60 percent: if daily volatility rises by one percent (at the daily mean of 2 percent), bond issuances fall by between 5 and 7 percent.
- A 10-point improvement in the Institutional Investor rating substantially lowers spreads: 32 percent for loans and 48 percent for bonds (largest effect in the mid-debt range).
- For borrowers with debt/GDP ratios below 60 percent, improved credit ratings have a relatively small impact on bank lending.

### Repeat borrowing versus IMF programs
- Repeat borrowing:
  - Repeat borrowing significantly reduces spreads on syndicated loans; the coefficient on the log of repeat bank borrowing is negative, significant and larger than the corresponding coefficient for bond markets across all three debt/GDP categories.
  - A second loan reduces spreads by about 10 percent.
  - A third loan has a spread about 6 percent lower than the second loan, after which the impact declines to low levels.
  - In bond markets, repeat issuance lowers spreads only for lightly indebted countries; repeated bond issuance lowers spreads only in the 10-30 percent debt/GDP range and may raise spreads in higher ranges (coordination problems).
- IMF programs:
  - IMF programs reduce spreads and enhance access mainly in bond markets, especially for medium-debt countries with debt/GDP ratios in the 40-60 percent range.
  - For countries in the 40-60 percent debt/GDP range, bond issuance is about 13 percent higher when there is a Fund program and spreads are 40 percent lower.
  - IMF programs facilitate bank borrowing in the medium-debt range but the impact on loan spreads is insignificant.
  - In the low-debt range (below 30 percent), countries with IMF programs borrow little and negotiating a program appears associated with unobserved characteristics that raise spreads rather than lower them.

### Sensitivity and extensions
- Cutoff sensitivity (overlapping debt/GDP intervals from 10-30 up to 60-80 percent):
  - Loans: repeat borrowing is significant in all 6 intervals; the value of repeat borrowing is greater for loans than for bonds in every debt category.
  - IMF programs: do not reduce loan spreads significantly and are associated with higher loan spreads until debt/GDP is between 40 and 50 percent; for debt/GDP above 50 percent, IMF programs are associated with a higher frequency of bank borrowing without apparent adverse effect on spreads.
  - Bonds: repeated issuance lowers spreads only in the 10-30 percent range; IMF programs strengthen their spread-reducing effect as debt/GDP approaches 40-60 percent; beyond that, the influence weakens. Fund programs are associated with more bond issuance strongest when indebtedness is between 20 and 60 percent of GDP.
- Size of IMF lending (IMF amount normalized by country external debt):
  - For bonds, the principal impact of IMF-supported programs on spreads is in the intermediate debt category; higher debt/GDP reduces the program impact on bond markets.
  - The amount of IMF lending does not influence bond spreads (consistent with Fund as monitor rather than liquidity provider).
  - For bank loans, larger IMF assistance is associated with higher spreads in the two low-debt categories (availability of additional IMF resources allows additional borrowing but appears to eliminate creditor coordination advantage).
  - In the medium-debt range, adverse effects of increasing debt levels from 40 to 60 percent of GDP are mitigated by the presence of an IMF program.
- Precautionary programs:
  - For bank loans (and to a lesser extent bonds), programs that are precautionary at outset reduce both issuance and spreads.
  - Programs that turn precautionary tend not to change issuance frequency but do reduce spreads—largest for countries in the high-debt zone; both banks and bond markets enjoy lower spreads when a program turns precautionary, with a larger impact in bond markets.
  - The relationship with the Fund (rather than the amount lent) matters—supporting a Fund monitoring/country signaling function.
- Private versus public borrowers:
  - Repeat borrowing reduces spreads more strongly for bank loans than bonds irrespective of borrower sector, with the effect larger for private-sector borrowers.
  - A second loan reduces the spreads charged private bank borrowers by about 13 percent, while public borrowers achieve, on average, a 7 percent spread reduction.
  - In bond markets, private borrowers gain most from IMF programs in the intermediate debt category: a Fund program reduces bond spreads for private borrowers in this zone by 47 percent while raising the probability of bond issuance by 27 percent.
  - Public borrowers face rising bond spreads as they borrow more, suggesting coordination effects dominate information gains.

### Representative quantitative magnitudes from regressions and tables
- Spread effects and program/borrower interactions reported across multiple regressions and debt/GDP partitions (examples drawn directly from empirical results):
  - Loans (Table 4 spread equation): Log of Repeat Borrowing coefficients: -0.139 (Low), -0.149 (Medium), -0.142 (High) — all significant.
  - Bonds (Table 4 spread equation): Log of Repeat Borrowing coefficients: -0.038 (Low), 0.047 (Medium), 0.015 (High) — less consistent significance.
  - Table 5A (Loans by overlapping debt ranges): IMF Program spread coefficients: 0.561, 0.230, 0.272, -0.041, -0.091, -0.081 for ranges 10-30, 20-40, 30-50, 40-60, 50-70, 60-80; Repeat Borrowing spread coefficients: -0.174, -0.090, -0.058, -0.149, -0.159, -0.146 (all significant where indicated).
  - Table 5B (Bonds by overlapping debt ranges): IMF Program spread coefficients: 0.034, -0.000, -0.043, -0.392, -0.252, -0.023 for ranges 10-30, 20-40, 30-50, 40-60, 50-70, 60-80; Repeat Borrowing spread coefficients: -0.067, -0.022, -0.004, 0.047, 0.067, 0.013.
  - Table 6 (Does the Amount of IMF Lending Matter?): Loans — IMF Amount/Debt coefficients: 2.941 (Low), 6.922 (Medium), 1.801 (High); Bonds — IMF Amount/Debt coefficients: 0.386 (Low), 4.357 (Medium), 0.033 (High); Log of Repeat Borrowing remains negative and significant for loans (-0.143, -0.139, -0.146).
  - Table 7A/7B (Precautionary programs): Precautionary Program spread coefficients for loans and bonds vary by debt range, often negative and significant (examples: Bank loans — Precautionary Program coefficient -0.533 in 20-40 range; Bonds — Turned Precautionary coefficients negative and significant in some ranges).
  - Table 8 (Private vs Public borrowers): Private borrowers — Log of Repeat Borrowing coefficients (Loans): -0.133, -0.179, -0.179 (Low, Medium, High); IMF Program reduces bond spreads for private borrowers in the medium debt zone (spread equation interaction reported: -0.466 for bonds medium in Panel A) and other coefficients as reported.

### Policy implications and interpretation
- Distinguish markets by instrument and intermediary: bank loans and bonds respond differently to information revelation (repeat borrowing) and to IMF monitoring/signaling (IMF programs).
- Banks have a comparative advantage in bridging information asymmetries through repeated lending; repeat transactions convey borrower information, reducing loan risk premia.
- IMF monitoring and surveillance matter more in bond markets, with greatest impact when debt reaches 40 percent of GDP (countries vulnerable to liquidity shocks).
- As indebtedness rises beyond intermediate levels, the monitoring impact of the IMF on spreads declines; liquidity provision (amount lent) matters less than the signaling/monitoring relationship except where insolvency risk is severe.
- Precautionary program implementation and the persistence of a Fund relationship can improve market access (spread reductions), particularly for high-debt countries when programs turn precautionary.

*Italic source attribution: IMF working paper (extracted content unit)._

### APPENDIX I

### APPENDIX I

### Bond dataset: coverage and bond characteristics
- Period: 1991 to 2002.
- Data sources: Loanware and Bondware.
- Included bond-level variables:
  - Launch spreads over risk free rates (in basis points, where one basis point is one-hundredth of a percentage point).
  - The amount of the issue (millions of US$).
  - Maturity in years.
  - Borrower type: sovereign, other public sector entity, or private debtor.
  - Currency of issue.
  - Whether the bond had a fixed or floating rate.
  - Borrower’s industrial sector: manufacturing, financial services, utility or infrastructure, other services, or government (where government, in this case, refers to subsovereign entities and central banks, which could not be classified in the other four industrial sectors).

### Global variables
- U.S. industrial production growth rate: average of month-month growth rate over a quarter.
- U.S. ten-year swap spread.
- Emerging Market Bond Index (EMBI): standard deviation of difference in log of daily spreads.

### Country characteristics (variables, units, periodicity, and sources)
- Total external debt (EDT)
  - Unit: US$
  - Periodicity: Annual
  - Source: WEO
  - Series: D
- Gross national product (GNP, current prices)
  - Unit: US$
  - Periodicity: Annual
  - Source: WEO
  - Series: NGDPD
- Gross domestic product (GDPNC, current prices)
  - Unit: National
  - Periodicity: Annual
  - Source: WEO
  - Series: NGDP
- Gross domestic product (GDP90, 1990 prices)
  - Unit: National
  - Periodicity: Annual
  - Source: WEO
  - Series: NGDP_R
- Total debt service (TDS)
  - Unit: US$
  - Periodicity: Annual
  - Source: WEO
  - Series: DS
- Exports (XGS)
  - Unit: US$
  - Periodicity: Annual
  - Source: WEO
  - Series: BX
- Exports (X)
  - Unit: US$
  - Periodicity: Monthly
  - Source: IFS
  - Series: M#c|70__dzf
- Reserves (RESIMF)
  - Unit: US$
  - Periodicity: Quarterly
  - Source: IFS
  - Series: q#c|_1l_dzf
- Imports (IMP)
  - Unit: US$
  - Periodicity: Quarterly
  - Source: IFS
  - Series: q#c|71__dzf
- Domestic bank credit (CLM_PVT)
  - Unit: National
  - Periodicity: Quarterly
  - Source: IFS
  - Series: q#c|32d__zf
  - Note: Credit to private sector.
- Short-term bank debt (BISSHT)
  - Unit: US$
  - Periodicity: semi-annual
  - Source: BIS
  - Note: Cross-border bank claims in all currencies and local claims in nonlocal currencies of maturity up to and including one year.
- Total bank debt (BISTOT)
  - Unit: US$
  - Periodicity: semi-annual
  - Source: BIS
  - Note: Total consolidated cross-border claims in all currencies and local claims in nonlocal currencies.
- Credit rating (CRTG)
  - Unit: Scale
  - Periodicity: semi-annual
  - Source: Institutional Investor

### Constructed variables (definitions/formulas)
- Debt/GNP: EDT/GNP
- Debt service/exports: TDS/XGS
- GDP/growth: 0.25*ln[GDP90_t/GDP90_{t-1}]
- Standard deviation of export growth: Standard deviation of monthly growth rates of exports (over six months)
- Reserves/imports: RESIMF/IMP
- Reserves/GNP: RESIMF/GNP
- Reserves/short-term debt: RESIMF/BISSHT
- Short-term debt/total debt: BISSHT/BISTOT
- Domestic credit/GDP: CLM_PVT/(GDPNC/4)

### Data sources and completion of missing data
- Primary sources: International Monetary Fund’s World Economic Outlook (WEO) and International Financial Statistics (IFS); IMF program data from the IMF’s Executive Board Documents and Staff Estimates; World Bank’s World Debt Tables (WDT) and Global Development Finance (GDF); Bank of International Settlements’ The Maturity, Sectoral, and Nationality Distribution of International Bank Lending.
- Credit ratings obtained from Institutional Investor's Country Credit Ratings.
- Missing data for some countries completed using the US State Department's Annual Country reports on Economic Policy and Trade Practices (available from http:www.state.gov/www/issues/economic/trade_reports/).
- U.S. industrial production obtained from the Federal Reserve.
- Swap rates and EMBI obtained from Bloomberg.

*Source: _wp0584 - APPENDIX I*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp0584.pdf_