1Includes money market instruments, bonds, and notes.
2Exchange-rate-adjusted changes in gross international bank claims.
1Ten-year interest rate swap yield less the 10-year benchmark note yield.
Banking and Financial Market Developments, the volume of new securities reached $1.8 trillion, surpassing that for 1998 as a whole. Apparently, the report explains, the rise of long-term interest rates in Europe and the United States did not hamper issuing activity in the international securities markets in the third quarter.
The most striking development during the quarter, the report notes, was the extraordinary widening of spreads on U.S. dollar and sterling interest rate swaps. Spreads on U.S. dollar swaps, in particular, exceeded third-quarter 1998 levels, perhaps reflecting liquidity pressures, with the increase in corporate bond issuance leading to an unusual amount of swap hedging activity by underwriters and investors.
There was no credit event in the third quarter of 1999 as large as Russia's debt moratorium in August 1998. However, financial market participants seemed troubled by several disturbing announcements, including Daewoo's default on its domestic and foreign loans, which caused a run on investment trusts and disrupted offshore securities markets, and, shortly afterward, rumors that Ecuador would miss an August payment on some of its outstanding Brady bonds, marking the first time a country missed a payment on its Brady debt. Fortunately, according to the report, these events did not create contagion on the scale that occurred in 1997 and 1998.
Since the beginning of 1999, the international bond market has recovered rapidly, the report states. While announcements of international bond and medium-term note issues declined by 8 percent, to $411 billion in the third quarter of 1999 from the previous quarter, they remained much higher than the quarterly average for 1998, which was $286 billion. Since the start of the year, most of the expansion in international business has resulted from the funding operations of financial institutions forced to pare down issuance following the market turbulence triggered by the Russian debt moratorium. The need to boost capital ratios, finance expansion into new areas, and fund corporate mergers and acquisitions has encouraged banks to return to securities markets. The introduction of the euro has consequently led to an increase in euro-denominated issuance, which closely follows that of the U.S. dollar. The combined share of dollar and euro issuance amounts to more than 80 percent of new issues, making the international bond market virtually a two-currency market.
In the syndicated loan market, activity declined slightly in the third quarter to $251 billion. However, it remained high by historical standards, reflecting a slowing of merger-related facilities from the quick pace of the second quarter. In the early part of the year, according to the BIS international banking statistics, international bank lending to the nonbank sector recovered. There was, however, an unusually large decline in interbank claims, partly attributed to the transition to the euro and to a cutback in Japanese interoffice transactions. Banking activity also reflected banks' further retrenchment from emerging market economies.
Quarterly Review: International Banking and Financial Market Developments, November 1999, is available from the BIS, CH-4002, Basel, Switzerland; the press release is also posted on the BIS website (http://www.bis.org).