The Role of Short-Term Debt in Recent Crises

• Author: Uri Dadush, Dipak Dasgupta, and Dilip Ratha
• Position: Director of, the World Bank's Economic Policy and Prospects Group/Sector Manager, Economic Policy, in the World Bank's Middle East and North Africa Region/Senior Economist

Short-term debt owed by developing countries to foreign banks rose from $176 billion to $454 billion between 1990 and 1997. This rapid buildup of short-term debt was a key factor in the financial crises that rocked Mexico in 1994-95, East Asia in 1997-98, and Russia and Brazil in 1998-99.

The 1990s witnessed a boom in short-term lending by international banks to developing countries that lasted until Asia's financial crisis erupted in 1997 (Table 1). By 1997, nearly 60 percent of all outstanding international bank claims on developing countries had a remaining maturity of less than one year, and some 50 percent of all new loans from international banks had maturities of one year or less, a much greater proportion than at the beginning of the decade (Chart 1). The volume of short-term debt grew fastest in East Asia, followed by Latin America. The top 10 recipients of short-term loans during 1990-96 included Brazil, Korea, Mexico, Russia, and Thailand. Short-term debt exceeded international reserves in each of these countries in the period before the onset of large reversals of private capital flows and the financial crises (Charts 2 and 3).

[ SEE THE GRAPHIC AT THE ATTACHED RTF ]

Another noteworthy financial trend in the 1990s was a substantial increase in the share of private sector borrowing-especially by banks-in total borrowing. An examination of syndicated loan transactions reveals that, in recent years, more than 42 percent of short-term syndicated loans to emerging markets has gone to financial institutions. Almost one-third of short-term syndicated debt has been contracted by commercial banks. Compared with a decade earlier, the shares of short-term debt contracted by oil and gas enterprises and government agencies decreased significantly, while that of financial institutions increased.

Short-term lending by international banks increased rapidly despite a decline in the share of bank lending in total private debt flows to developing countries and the flat or declining indebtedness of developing countries relative to their export earnings and GDP. The growth of the developing countries' short-term debt in the 1990s thus reflected the fact that international banks were making more short-term loans even as they were reducing their overall lending to developing countries and their exposure in terms of their capital at risk.

Shortening maturities

The growth of short-term debt in the 1990s seems to have accompanied higher incomes, stronger GDP growth, and greater openness to trade in borrowing countries. But these factors were only partly responsible for the surge in short-term borrowing. During this period, for example, Asian banks and financial institutions were borrowing heavily-and rapidly building up...