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Debt Financing Rollercoaster Latin American and Caribbean Access to International Bond Markets Since the Debt Crisis, 1982-2012

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Debt Financing Rollercoaster Latin American and Caribbean Access to International Bond Markets Since the Debt Crisis, 1982-2012 Imagen abstracta que sugiere alzas y bajas a modo de montaña rusa y a la vez gráfico de mercado en un contexto complejo y variable. Debt financing rollercoaster Latin American and Caribbean access to international bond markets since the debt crisis, 1982-2012 Inés Bustillo Helvia Velloso Debt financing rollercoaster Latin American and Caribbean access to international bond markets since the debt crisis, 1982-2012 Inés Bustillo Helvia Velloso Economic Commission for Latin America and the Caribbean (ECLAC), Santiago, Chile, September 2013 Libros de la CEPAL 119 Alicia Bárcena Executive Secretary Antonio Prado Deputy Executive Secretary Inés Bustillo Chief, ECLAC office in Washington, D.C. Ricardo Pérez Chief, Documents and Publications Division This document was prepared by Inés Bustillo, Chief, and Helvia Velloso, Economic Affairs Officer, of the Economic Commission for Latin America and the Caribbean (ECLAC) office in Washington, D.C. The authors first started to monitor the access of Latin America and Caribbean countries to international bond markets in 1998, at the suggestion of José Antonio Ocampo, then Executive Secretary of ECLAC. The authors are very grateful for his support and insightful comments throughout the many years of work on the topic. They are also thankful to participants in the conference “The debt crisis 30 years later”, organized by ECLAC, the Andean Development Corporation (CAF), the German Agency for International Cooperation (GIZ) and the Ibero-American Secretariat (SEGIB), held at at the Commission’s subregional headquarters in Mexico, on 18-19 February 2013, for the discussions and feedback that helped to enhance the work presented in this book. The views expressed in this document are those of the authors and do not necessarily reflect the views of the Organization. Cover design: Marcela Veas United Nations publication ISBN: 978-92-1-121835-0 • E-ISBN: 978-92-1-056011-5 LC/G.2570-P Sales No. E.13.II.G.12 Copyright © United Nations, September 2013. All rights reserved Printed at United Nations, Santiago, Chile • 2013-301 Applications for the right to reproduce this work are welcomed and should be sent to the Secretary of the Publications Board, United Nations Headquarters, New York, N.Y. 10017, United States. Member States and the governmental institutions may reproduce this work without prior authorization, but are requested to mention the source and inform the United Nations of such reproduction. Contents List of abbreviations ............................................................................................ 9 Foreword ............................................................................................................. 11 Abstract ................................................................................................................ 15 Introduction ........................................................................................................ 17 Chapter I The origins of the asset class: the debt crisis of the 1980s ............................ 21 A. The early years: 1983-1985 ................................................................... 23 B. Debt-equity conversion schemes: 1986-1987 ..................................... 24 C. Aztec bonds: 1987-1988 ........................................................................ 25 Chapter II Brady bonds ....................................................................................................... 27 A. The Baker Plan ....................................................................................... 28 B. The Brady Plan ...................................................................................... 28 C. Buybacks and swaps ............................................................................ 34 Chapter III Emerging market tradable debt: the maturing of the asset class ................ 39 A. Evolution of the asset class: 1990s to 2000s ...................................... 40 B. Emerging market debt universe ......................................................... 41 Chapter IV Developments in new debt issuance ............................................................... 47 A. Rising above original sin...................................................................... 52 B. The rise in corporate issuance ............................................................. 55 C. Improving terms of borrowing ........................................................... 63 4 ECLAC Chapter V Debt spreads rollercoaster: evolution and performance .............................. 65 A. From reeling highs to historical lows: the driving forces behind spreads evolution .................................................................... 68 B. Market sentiment and the behaviour of debt spreads .....................70 C. United States interest rates and Latin American and Caribbean debt spreads .............................................................. 74 D. Latin American and Caribbean debt spreads and mature equity markets ................................................................. 80 E. Latin American and Caribbean debt spreads versus United States high-yield corporate bonds ........................................ 82 Chapter VI The long road to improved credit quality ...................................................... 87 A. The evolution of Latin American and Caribbean credit ratings ........................................................................................ 89 B. Sovereign credit ratings and their impact on spreads .......................................................................................... 104 Chapter VII Unequal access: a closer look at Central America and the Caribbean ........ 109 A. New debt issuance .............................................................................. 112 B. Sovereign debt spreads ...................................................................... 116 C. Evolution of credit ratings ................................................................ 119 Chapter VIII Looking ahead: are emerging and developed debt markets converging? ........................................................................................ 125 Bibliography ..................................................................................................... 129 Tables II.1 Brady agreements with commercial banks in Latin America and the Caribbean ���������������������������������������������������� 31 II.2 Original Brady exchange issue amounts ............................................. 31 II.3 Original amounts and outstanding balances of Brady bonds as of March 2006.......................................................... 37 IV.1 Latin America and the Caribbean: international bond issues ......... 51 IV.2 Latin America and the Caribbean: breakdown of international corporate bond issuance by country, 2005-2012 ................................ 60 V.1 Elasticity coefficients of Latin versus non-Latin components of the EMBI+ ������������������������������������������������������������������������������������������� 70 Debt financing rollercoaster: Latin American and Caribbean access... 5 V.2 Elasticity coefficients for individual countries with respect to the regional total ��������������������������������������������������������������������������������� 72 V.3 Correlation coefficients, December 1997 to December 2012 ............. 73 V.4 Correlation coefficients, May 1999 to December 2012 ....................... 73 V.5 Correlations between United States interest rates and the Latin component of the EMBI+ ...................................................... 76 V.6 Correlations between S&P 500 Index and the Latin component of the EMBI+ �������������������������������������������������������������������������������������������� 82 V.7 Correlations between United States High-Yield Master Index and the Latin component of the EMBI+ .............................................. 84 VI.1 Sovereign rating history in Latin America and the Caribbean ........ 95 VI.2 Credit rating scale ��������������������������������������������������������������������������������� 104 VI.3 Standard & Poor’s downgrades to selective default and upgrades to investment grade .................................................... 107 Figures 1 Composition of net private capital flows in Latin America and the Caribbean ���������������������������������������������������� 19 I.1 Composition of net private capital flows in Latin America and the Caribbean in the 1980s ............................. 22 II.1 The decline of Brady debt ��������������������������������������������������������������������� 38 III.1 Total outstanding global emerging market and Latin American and Caribbean tradable debt ................................................................ 42 III.2 Total global emerging market external tradable debt: regional breakdown, 2000-2012 .................................................. 43 III.3 Total global emerging market external tradable debt: regional breakdown, 2012 ���������������������������������������������������������������������� 43 III.4 Latin America and the Caribbean: outstanding external tradable debt by issuer type, 2000-2012 ............................................... 44 III.5 Emerging market debt: trading share by instrument ........................ 45 IV.1 Latin America and the Caribbean: composition of net private capital flows, 1990s and 2000s ................................................ 48 IV.2 Annual new debt issuance in Latin America
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