International Loan Capital Flows
The nature of international loan capital flows
International loan capital flows are financial transactions, related to international loans, crediting, bank deposits and transactions, which cannot be characterized as direct, portfolio investment or reserve assets.
International crediting and loans are a movement of loan capital beyond the national boundaries of countries between the entities of international economic relations, providing currency and commodity resources under conditions of recurrence, urgency and interest payment.
Each country is an exporter and an importer of capital. International credit is involved in the turnover of capital in all stages, mediating its transition from one form to another one: from cash to a productive, then to commodity and to cash again.
International credit is considered as a special kind of international trade. This trade is not a one-time exchange of goods for goods, but supplying or receiving goods today in exchange for receiving or return of goods in the future. This exchange is called an intertemporal trade.
In economics, there is always a problem of choice between current and future consumption. As a rule, the produced goods are not consumed immediately, some of them are used as a productive capital for production expansion in order to increase consumption in the future. In other words, it is a choice between the production of consumer products now and in the future.
International credit gives you an opportunity to trade in time. If a creditor-country provides a loan, it sells the present consumption for future consumption. A borrower-country, taking a loan, can spend today more than earned, in exchange for the obligation to pay compensation in the future for today's consumption. The countries, taking loans, and the countries, providing them, are determined by production capacity. Countries with good current investment opportunities take loans from other countries, which do not have such relative investment opportunities but have great current incomes.
Countries with relatively large financial resources in comparison to their profitable use internally can increase their national income by means of providing credit to the countries which have higher rate of income on capital (percentage, dividend). An importer-country of capital receives an opportunity to increase its national income at the expense of foreign investment received in more favorable terms in comparison with the internal terms of crediting. In general, through international credit there is a maximization of the world product at the expense of the general increase in world production.
The importance of international crediting lie in a fact that due to it there is the redistribution of capital among countries in accordance with the needs and opportunities of more profitable use. Creditors and borrowers are banks, firms, public institutions, governments, international and regional currency-credit and financial organizations.
The effectiveness of crediting is reached upon condition that there are:
• free movement of capital;
• stability and predictability of the development of the world economy;
• borrowers' implementation of their obligations, full payment of their debts. Development of international crediting today is largely determined by the activities of TNCs and its role's enhancement in the evolution of international economic relations.
The time limits for performance of liability commitments (sale of property) play an important role in the capital movement. They can be the following:
• long-term (over 5-7 years);
• short-term (up to 1 year).
The main form of international long-term crediting is international loans. Depending on who is the creditor, they are divided into private, governmental credits, credits of international and regional organizations.
Private loans are provided by major commercial banks in the world from their resources. In recent years, the proportion of external credits in the total export of loan capital of these banks has declined, but they do not lose their status of major international creditors. Private long-term loans can be provided not only by the resources of banks. Banks use the means of renters of large countries for these purposes with the help of the bond loans (external emissions). Investment banks place the securities (obligations) on the stock market of their countries, issued by private foreign companies or governmental agencies. Thus, creditors are big countries with a well-developed stock market and a significant surplus of loan capital. However, not all obligations of foreign loans are placed among other holders. Some part of the obligations with high reliability and profitability are left by the banks for themselves, receiving interest income from the loans (8-10% annually).
Governmental loans (intergovernmental, state loans) are given by government crediting institutions. A country assumes all the costs connected with the loan, it relieves expenditures in case of non-payment of debt.
Loans of international organizations are given mainly by: the International Monetary Fund; the structures of the World Bank; the International Bank for Reconstruction and Development; regional development banks and other credit and financial institutions.
It should be noted that the International Monetary Fund and the World Bank are not only the largest creditors, but also coordinators of international crediting. For the purpose intended, international loans are divided into the following:
• production credits for the development of national economy, which are sent to industry, transport, agriculture (purchase of equipment, materials, licenses, productive services, etc.);
• non-production credits to provide the government, the army, the purchase of weapons, the payment of interest on foreign debts, etc. The share of credits of non-production character in the total amount of foreign credits increases.
The movement of short-term loan capital has the following forms:
a) commercial and bank credit;
b) current accounts in foreign banks.
Commercial (corporate) credit is widely used in foreign trade and given by an exporter of one country to an importer of another country in the form of a payment delay. In the commercial credit, a loan operation is combined with the sale of goods, and the movement of loan capital is combined with the movement of commodity capital.
Bank short-term crediting is the provision of funds in the monetary form on the security of goods, commodity documents and bills.
The cost of short-term credits is high enough (6-9% annually). Commercial loans are commonly used by English, German, French, Japanese firms for the purpose of foreign trade expansion.
Companies and banks use current accounts in foreign banks to attract free money capital of other countries. Current accounts in foreign banks are characterized by high mobility, variability, dependence on the economic and political conditions. Thus, countries can use them with a view to the exploitation of less developed countries (for example, to "freeze" the deposits that are formed as a result of goods delivery).
The international debt emerge
The practice of international crediting clearly shows how the actual development of international loan disagree with such conditions of normal work of the credit system as stability and timely payment of debts.
A tangible proof of mentioned above statement is the global debt crisis.
The main reason of the periodic occurrence of international debt crisis is a presence of strong motivation of sovereign debtors to refuse the payment of the debt. If the governments of the debt countries come to the conclusion that all payment obligations do not provide net inflow of funds in the future any more, there is an incentive to abandon some or all payments of the debts but to avoid outflow of resources from countries.
A reason to stop paying by the sovereign debtors helps explain some features of the behavior of international creditors. One of them is perseverance in establishing a higher interest rate in loans to foreign governments in comparison with the loans to private and public borrowers in their own country. The requirement for a higher interest rate is a way to get some kind of insurance award in case of non-payment of debts: while there is no crisis, creditors receive this award, but in case of a crisis they bear large losses.
What can solve the problem of non-payment? It may not be a traditional offer, linking new loans to the debtor with the requirement of "belt-tightening". To delay the time of non-payment of debts, new loans should cover at least the payments of interest and the principal sum of the loan. But even if the new loans are so high, their provision increases the total amount of debt, which a debtor can finally refuse to pay for, regardless of how long a new crediting lasts.
A reliable way to solve a problem of right of ownership of loans, granted to sovereign debtors, is the introduction of a pledge or security, i.e. the assets of any type, which may go into the ownership of the creditor in case of suspension of paying for the debt by the borrower. In transactions on loans within a country, a legal loan or security play an important role in maintaining of payments on debt and simultaneously strengthen the creditability of the debtor, allowing him to obtain loans at a lower interest rate and convenient temporary schema. In the past, the countries, paying for their debts on time, were those whose creditors were able to arrest the assets of the debtors in case of failure to meet the deadline of payment terms.
Despite the adoption of the measures by governments, the total debt of countries of the world in 2012 was amounted to $69,080 billion ($62,500 billion in 2011). Over the last 10 years, the total debt of all countries of the world increased by 2 times .
Thus, international debt is a serious problem in the world economy. The economic situation of a country, as a result of the globalization of financial markets, becomes more dependent on external resources, required to cover the budget deficit, domestic investment, socio-economic reforms and execution of debt obligations. Mobility and the scopes of capital flows depend on the level of the country's development. Financial resources, received in the form of loans on the commercial terms by a country, cause the incurring of external debt, since they require appropriate payment.
The nature of external debt of the country and its restructuring
External debt is the amount of financial obligations of a country owed to foreign creditors for unpaid foreign loans and interests.
Long-term debt obligations of a country include the following:
• the external public (official) debt, which is the amount of obligations of central and local state bodies to external creditors for unpaid loans and interest. External creditors can be foreign governments, central banks, governmental bodies, international and regional monetary and financial organizations;
• the state-guaranteed debt, i.e. an obligation of private firms, banks, companies, where the guarantor of payment is the country;
• private non-guaranteed debt, i.e. a debt of private borrowers that is not guaranteed by a country. It occurs when a borrower receives bank and other loans by means of purchasing debt securities in the international stock market. External debt service payments are usually made in a foreign currency.
Return of loans by sovereign debtors is the most possible in terms of their capacity to pay debt. Therefore, the creditors are ready for debt restructuring.
Debt restructuring is a rescheduling of debt obligations, which have an expired payment term. Debt restructuring is used to alleviate the debt burden of the least developed countries and countries with economies in transition. International practice accepted the concordance of this process within the Paris Club of official creditors and London Club of private creditors.
The measures of debt restructuring include transfer payments, reduction of the amount of debt or its full cancellation, conversion of debt into national assets of a debtor-countries and recapitalization. The mechanism of recapitalization involves exchanging debts for obligations of debtors, or providing them with new target loans to pay off former debts. Recapitalization is the most popular measure for restructuring the debt to commercial bank creditors. This mechanism was adopted in 1989, and is called the Brady Plan. According to the plan, banks restructure some part of the debt of the developing country (usually it is a lower interest payment) only if its government implements a more radical program of macroeconomic and structural changes.
Every creditor bank has the right to choose the methods of restructuring that are foreseen in the contract. However, on the basis of existing practice, banks choose an Advisory Committee that represents the interests of all creditor banks and negotiates with the debtor government.
Analyzing the results of the multilateral programs of overcoming the international debt crisis of the developing countries, the World Bank came to the following conclusions:
1. A major role in the economic development of a country is not played by external financing (loans and assistance), but by internal resources and a balanced economic policy.
2. The focus on external capital leads in the long term to a greater dependence of the socio-economic development of the country on unfavorable external events. External financing can play a positive role only when it complements and reinforces a healthy domestic economic policy.
Debt restructuring requires an economic policy, endorsed by the IMF, from a debtor-country. However, the practice of implementation of the IMF recommendations, without taking into account a country specificity, in many cases leads to a deterioration of the economy, causes social conflicts, forcing to abandon some of the requirements of the IMF and thus makes the debt crisis difficult to overcome.