Borrowing by state could hit companies

HEAVY government borrowing on the world bond markets this year could hit companies by limiting the amount they can borrow, according to the Organisation for Economic Co-operation and Development in a report on financial market trends, writes Peter Rodgers.

The OECD says there is a risk that second-tier companies - those just behind the largest multinationals - will be crowded out of the market by governments.

The Euromarkets have begun 1993 on an 'exceptionally strong footing'. Though the dollars 10bn-a- week rate at which new issues are being made cannot be expected to continue, there is a consensus that issues this year as a whole will 'remain particularly hefty' because demand for capital is much larger than in recent years.

In particular, borrowing requirements of OECD governments - the industrial nations - have risen considerably, which will have to be financed internationally on a substantial scale, the report says.

On top of these demands for capital, some developing countries have regained a 'degree of creditworthiness' and are returning to the markets to borrow, while international banks are also borrowing to build up capital to meet new requirements, the OECD adds.

'If demands by public sector entities were to remain extremely heavy for a prolonged period of time, there is a risk of some crowding out of second-tier corporates,' the report says.

The OECD believes there is scope for a further worldwide decline in interest rates, which will encourage buying of bonds. But it does not expect depressed bank loan markets to rebound.