Trading in Third World Debt Soars as Investors Rush In
NEW YORK -- Trading in Third World bank debt and bonds in expected to rise 30% this year, to more than $150 billion, and could easily double over the next few years, according to a report published this week by Salomon Brothers Inc.
Debt traders said that more buying by institutional and private investors was one of the main reasons behind the surge.
They added that the conversion of billions of dollars in problem bank loans into more easily traded bonds under debt restructuring agreements is also adding to volume, as is a rapid increase in the number of Euro-market bond issues by Latin American countries.
Breaking New Ground
"We're moving into a bigger equation and a much more standardized market," said Peter Geraghty, senior vice president at NMB-Postbank in New York and vice chairman of the LDC Debt Traders Association.
Mr. Geraghty and other traders cautioned, however, that no exact figures exist, since there is no formal reporting system for trading in Third World debt and much of the debt is placed privately.
Market Is Still Young
Trading in Third World debt first began in the mid 1980s, when banks started selling off their problem loans, mainly to other banks.
Big U.S. banks, such as J.P. Morgan & Co., Chase Manhattan Corp., Manufacturers Hanover Trust Corp., and Citicorp, along with some foreign banks and investment banks, handle most of the trading in Third World debt.
According to the Salomon estimates, trading in developing-country bonds will reach $90 billion by the end of this year, up from $56 billion in 1990.
Discounted bank loans to Third World countries will make up the balance of the $150 billion.
"The market has become increasingly diverse," John F.H. Purcell, Salomon's director of sovereign debt research, noted in the report.
"For the first time, nonbank institutional investors such as insurance companies, money managers, pension funds, mutual funds, and even traditional equity investors are entering the market in a serious way."
Larger buying by nonbank investors has sharply raised prices for Third World debt since last year.
According to figures compiled by the company, prices of bank loans to Brazil rose 50%, to 34.5 cents of the dollar, between November last year and the end of July. Moroccan loan prices rose 39%, to 54 cents. Loans to Nigeria rose 34%, to 43 cents.
Prices for bonds that Mexico, Venezuela, and Costa Rica issued in exchange for bank loans have also increased sharply. [Tabular Data Omitted]