Syndicated Loans and the Financing of Distressed Emerging Markets

Abstract

This chapter extends the work of Altunbaş, Chakravarty and Kara (2004) and examines the effect of the IMF’s imprimatur (seal of approval) on the cost of borrowing in the international syndicated loan markets between 1993 and 2001. It appears that the IMF-assisted countries paid higher spreads over LIBOR for short-term loans and had obtained fewer long-term loan contracts compared to their non-IMF peers for the financing of similar purpose projects. This may indicate a lack of confidence on the part of creditors that IMF prescriptions would have the desired effect in the long run on the economies of the client nations. Also, the pricing of syndicated loans for projects in these countries is inversely related to the level of short-term debt, signalling that creditors perhaps expect a bailout if a financial crisis occurs in the assisted nations. The academic critique of IMF policies and their implications for political economy, moral hazard and financial instability, is discussed first. Subsequently, an analysis of borrowing costs is undertaken by focusing on the impact of microeconomic loan characteristics and debt-distressed countries’ macroeconomic indicators on loan spreads.