Lending to developing countries will fall, say banks

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The Independent Online
FLOWS OF private capital to emerging economies will recover slightly next year, according to new forecasts from the Institute of International Finance.

But the Washington-based association of commercial banks warned that bank lending would continue to fall because of uncertainty over plans to force banks to take part in future IMF rescue plans. Sir John Bond, chairman of the IIF and of HSBC, the banking giant, said: "There is anxiety that the IMF and G7 are supporting involuntary techniques involving the private sector in crisis resolution."

The communique of the G7 meeting on Saturday backed a case-by-case approach to crises, which will reassure bankers, but the banks are alarmed by the recent IMF decision to support a partial default on its bonds by Ecuador. And the communique made it clear that private lenders should not always expect to be repaid in future crises. It said: "No one category of credits should be regarded as inherently privileged relative to others."

Eddie George, Governor of the Bank of England, said: "A dialogue with the private sector will carry on."

The banks object in particular to an earlier proposal backed by Gordon Brown, now chairman of a key IMF committee, that new bonds issued by emerging market countries should have "collective action" clauses. These would allow debt restructuring with majority rather than unanimous agreement from the lenders.

William Rhodes, vice chairman of the Institute and of Citigroup, said: "Any modification of bond clauses must be voluntary and market-based."

The latest forecasts from the IIF predict private-sector lending to the leading emerging market economies will climb to $155bn in 2000 from $136bn in 1999. The totals remain far below the 1996 record of $335bn.

Charles Dallara, IIF managing director, said: "We would discourage officials from pursuing involuntary approaches that would dampen the appetite of emerging markets' lenders and investors."

IMF-led rescues, he said, had not bailed out the commercial banks. He added that private investors had lost $350bn in emerging markets between mid-1997 and the end of 1998.