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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of International Financial Markets, Institutions and Money,, Volume 17, Issue 4, October 2007, Pages 372-386
This paper shows that high macroeconomic volatility, lax rule of law, and inefficient bureaucracy in foreign countries contributes to a tilt toward short-term maturity of international debt. The results are important as short-term debt has been linked to several financial crises in recent years. The paper explores factors that contribute to short-term lending. The results are obtained using data on international lending by three groups of U.S. banks: large, medium-sized, and small. The effect of uncertainty on debt maturity is particularly strong in emerging economies and for smaller banks.
International debt maturity has become an important topic in international finance in recent years. Radelet and Sachs (1998), Chang and Velasco (2001), and others have argued that large exposure to short-term international capital contributed to financial crises in several emerging markets in the 1990s. There is, however, limited evidence on the factors that explain the maturity of international debt. For example, why does 63% of credit by U.S. banks to borrowers in Uruguay have maturity longer than 1 year whereas only 20% of credit to borrowers in Peru has that same maturity? What factors explain why some countries find it difficult to obtain long-term financing? The main question in this paper is whether economic and non-economic uncertainty in foreign countries contributes to a tilt toward short-term maturity in international debt. The paper uses data on international lending by U.S. banks to extend Rodrik and Velasco (1999), Buch (2003), Buch and Lusinyan (2003), and Valev (2006) by introducing an array of uncertainty variables to the list of variables used in those analyses.1 In terms of economic uncertainty, Catao and Sutton (2002) show that countries with greater macroeconomic volatility are more likely to default on international loans. In these countries, lenders prefer short-term exposure so that they can pull out if a crisis seems imminent, i.e. high volatility can be associated with short-term debt. Conversely, high volatility might lead to longer maturity. Countries with greater income volatility prefer long-term debt in order to lock in the terms of financing and to spread debt service payments more equally over time. Thus, whether macroeconomic volatility contributes to shorter or longer maturity of international debt is an empirical question. Our estimations reveal an interesting non-linear relationship. While greater output volatility is associated with longer debt maturity at low and medium levels, output volatility contributes to shorter-term debt at very high levels.2 In terms of non-economic uncertainty, Citron and Nickelsburg (1987) and Ozler and Tabellini (1991) show that in countries with high political uncertainty, current governments discount the future gains from access to capital markets and are more likely to default. Hence, political uncertainty is associated with lower loan volumes and with greater cost of borrowed funds (De Haan et al., 1997). In Rodrik and Velasco (1999), upcoming elections result in either a “populist” or an “orthodox” government. As orthodox governments are more likely to service international debt compared to populist governments, lenders prefer to lend short-term leading up to the elections.3Valev (2006) and Mina and Valev (2002) test empirically this hypothesis and find that international lending by U.S. banks has shorter maturity in countries with greater political and institution uncertainty. This paper extends the earlier literature by investigating the effect of macroeconomic volatility on international debt maturity. Importantly, economic and non-economic uncertainty are studied in conjunction with each other. Recent literature, e.g. Acemoglu et al. (2003) and Cooley et al. (2003) show that institutional weakness and macroeconomic volatility are closely linked. Yet, empirical models that study the effect of uncertainty on investment usually include either economic volatility (as in Catao and Sutton, 2002) or institution quality (as in Valev, 2006) but not both. Thus, a negative effect of economic volatility on investment may in fact be capturing the effect of weak institutions and vice versa. Our analysis shows that the two types of uncertainty, while highly correlated, have strong independent effects on debt maturity. The rest of the paper is organized as follows. The next section presents the international lending data and the measures of non-economic uncertainty and economic volatility. Sections 3 and 4 discuss the empirical model and results. Section 5 concludes.
نتیجه گیری انگلیسی
This paper studies the maturity of loans made by U.S. banks to borrowers in 44 countries during the period from 1982 to 1996. The paper builds on work by Rodrik and Velasco (1999), Buch (2003), Buch and Lusinyan (2003), and Valev (2006) by investigating the effect of macroeconomic volatility on international debt maturity in conjunction with uncertainty generated by weak institutions. The effect of economic and non-economic uncertainty must be studied in a unified framework because the two are highly correlated and omitting one from an analysis might produce biased results. The results show that weak rule of law and inefficient bureaucracy in a country contribute to shorter maturity of international debt. This effect holds for banks of different sizes and is robust to the inclusion of various controls in the model specifications. While macroeconomic volatility is generally associated with longer maturity of debt, it shortens maturity at high levels. The paper fills an important gap in the literature which has explored the effect of debt maturity on financial crises but has not explored the effect of economic and non-economic uncertainty on debt maturity. The results show that high macroeconomic instability as well as institutional problems, associated with lax rule of law and inefficient bureaucracy, explain why some countries find it difficult to lengthen the maturity of their international liabilities. Hence, improvements in macroeconomic stabilization policy and in institutions are needed to lengthen international debt maturity and to reduce the likelihood of international financial crises.