September 29, 2005
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On May 16, 2005 the Executive Board of the International Monetary Fund (IMF) held a seminar on Assessing the Determinants and Prospects of the Pace of Market Access by Countries Emerging from a Crisis—Further Considerations.1 The seminar provided an opportunity to discuss the conditions, timing and the policy challenges for the return to international capital markets of countries that experienced a crisis, including those that restructured their external bonds.
Background
Executive Directors discussed a paper on Assessing the Determinants and Prospects for the Pace of Market Access by Countries Emerging from Crises in September 2001. Based on the experience of ten emerging market countries—Argentina, Brazil, Indonesia, Korea, Mexico, Peru, Romania, Russia, Thailand, and Turkey—in returning to international capital markets from 1993 to 2000 and the limited literature on market reaccess, that paper concluded that this assessment requires considerable judgment, as the determinants of market reaccess are many and their relative importance for the pace of market access for countries emerging from crises depends on the circumstances for the loss of market access.
Executive Board Discussion
Ms. Anne O. Krueger, First Deputy Manager Director and Acting Chair, made the following remarks at the conclusion of the seminar:
"Executive Directors welcomed the opportunity to discuss further the determinants of and prospects for the pace of market access by countries emerging from crisis, as a follow-up to the informal Executive Board seminar that was held in September 2001. They observed that a number of developments make it worthwhile to revisit this issue. These include the return to international capital markets by some countries that have restructured their debt and the increased attention to market reaccess issues in both the public and private sectors. In addition, Directors noted that the issue of capital market reaccess is highly relevant to the Fund—especially in the context of crisis prevention and resolution, including the exceptional access framework. Directors considered that the staff's findings hold important lessons regarding the steps that countries emerging from a crisis need to take in order to reaccess international capital markets, particularly the need to build and sustain credibility in the country's policies.
"Directors reaffirmed the view expressed by many Directors at the earlier discussion that the circumstances underpinning the loss of market access are a key determinant of how and when a country regains market access. These circumstances include adverse developments in international capital markets and a deterioration of the domestic economic situation.
"Directors noted that countries that lose market access because of adverse market developments normally regain access quickly if there is only a minor decline in investors' risk appetite that does not affect the assessment of the country's creditworthiness. The analysis confirms the common sense expectation that if there is a significant decline in investors' risk appetite, the country would take considerably longer to regain market access.
"Directors observed that the length of time taken to regain market access varies when loss of access reflects both adverse market developments and policy slippages that give rise to concerns about the country's ability to service its debt. In this regard, Directors noted that no country has regained market access without committing to policy adjustments. Experience shows that, when conditions in international capital markets are favorable, market reaccess takes anywhere from several months to approximately a year and a half. The timing of reaccess depends heavily on the strength of the corrective policies the country implements. Such policies should be strong enough to improve the country's ability to repay its obligations and set the debt dynamics on a credible, sustainable course. Structural reforms play a crucial role in improving economic efficiency and creditworthiness. Some Directors suggested caution in paying undue reliance on tightening monetary policy in response to crises, given the associated balance sheet effects. Directors stressed the role that Fund policy advice can play in helping countries regain market access, and many Directors pointed to the importance of Fund financial assistance, including precautionary arrangements, to countries during the crisis period before access is regained.
"Directors considered that, as with a country emerging from crisis, a country that undertakes a debt restructuring would regain market access only after it demonstrates a commitment to strong corrective policies. The timing of the reaccess again depends on the nature of the external environment and the success of the policy efforts. In recent years, countries that have had bond restructurings have taken anywhere from 18 months to five or more years to restore market access, or four months to four years after completion of the debt restructuring. Directors also emphasized the importance of a sound and independent debt sustainability analysis in helping countries regain market access. It was also noted, however, that demand as well as supply factors influence capital flows, and that countries may choose to delay their reaccess to capital markets—for example, because of the cost of borrowing."
"Directors stressed that countries seeking to reaccess international capital markets should put in place a strong communications strategy to explain to investors their efforts in this regard—in particular, their efforts to strengthen their creditworthiness. The nature and objectives of the corrective policies need to be explained, including the assumptions and expected results, and data and other information need to be made available on a timely basis, particularly on the early results of the adjustment effort. This would allow investors to manage better the information risk associated with a country emerging from a crisis, and to reassess the risk-return tradeoff of possibly increasing their holdings of the country's debt. Directors believed that a country would benefit from open, two-way dialogue with investors to get feedback regarding its efforts to strengthen creditworthiness.
"Directors stressed that, in considering the characteristics of the reaccess bond, countries need to give careful attention to the selection of the target investors and the bond's size and maturity. Market participants often prefer that countries reaccessing international capital markets issue a fixed-coupon, bullet, or "plain vanilla" bond, which is easy to price and trade and facilitates price discovery. However, countries should also consider that issuing a bond with a more complicated structure, including amortizing features, could facilitate the management of certain risks, including rollover risk. This may be particularly true for countries that issue bonds infrequently.
"Directors supported continued work by the staff to analyze developments in capital markets, including the development of an analytical framework for predicting the pace and terms of market reaccess based on further analytical work and country experiences, the potential role played by reaccess to domestic markets, and the effects of Fund support including its signaling role on market reaccess and the implications for the Fund's work."
