The Package Makes the Deal: Sovereign debt crisis and lending strategies of Lloyds Bank International in Latin America, 1975 - 1983?

(with Catherine Schenk, University of Oxford)

So What? (short version)

In contrast to common literature, we argue that the decision of (British) banks to engage and on what terms in government lending in Latin America in the 1970s and 1980s was not exclusively determined by the possible risks and benefits of sovereign loans alone, but based on the assessment of what we call “lending packages”; sovereign debt loans together with commercial loans.

Tell me all about it (detailed version)

This project studies the lending policies and strategies of Lloyds Bank International in Latin America between 1975 and 1983. In particular, we address the question if and how the event of foreign debt defaults influenced the bank’s decision to (re-)lend to a country and on what terms.

In contrast to today, where the main source for external government financing is the international capital markets, in the 1970s and early 1980s, the majority of sovereign lending of the developing countries was done via direct banking credits. The emerging Latin American countries were one of the main borrowers, with their demand for external credit constantly increasing since the 1950s to finance their policy of imports substitution and the industrialization of their economies. With the increasing demand, and for reasons of risk diversification, the common practice was to offer credit as a bank syndicate, with one bank acting as a leading arranger. British banks were, behind the US banks, the most important players in the market, and Lloyds Bank International the most dominant. The continuous increase of external borrowing, additionally accelerated by increasing interest rates as consequence of the 1970s oil crisis, eventually overheated the market in the beginning of the 1980s, resulting in the most severe debt crisis of twentieth century Latin America.

We create a unique and novel data set containing the information on the amount, duration, and interest rate for 750 different loans provided by Lloyds Bank International to governments, public-, and private companies in Latin America[1] between 1975 and 1983.[2]

Literature studying the causes and development of the crisis usually focuses on the analysis of the sovereign debt agreements between countries and the banks. However, our preliminary findings indicate that the bank’s decision to engage in central government lending was not exclusively determined by the possible risks and benefits of sovereign loans alone, but based on the assessment of what we call “lending packages”; sovereign debt loans together with commercial loans. This practice did not change with the events of the sovereign debt crisis in the 1980s. In fact, the banks debt rescheduling strategy was based on the assessment of their “lending packages”, and credit lines for governments were first extended by renewing commercial loans rather than altering sovereign debt agreements. Comparing the amount of government and commercial loans provided by Lloyds International to Latin American countries between 1975 and 1983, our data shows that with the increasing involvement of the bank in government finance, simultaneously the amount of commercial loans increased. This seemed to be in particular the case for loans granted to companies that were linked to the public sector. In the year after the crisis, 1983, government as well as commercial loans experienced a severe drop, with the exception of long-term commercial loans. The decrease in the public sector was comparatively marginal, and in the private sector even spiked.

[1] The countries are: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, Mexico, Panama, Paraguay, Peru, and Venezuela.

[2] The data have been collected from the banks Confidential board papers. Additionally, we study the directors’ reports and the minutes of the Chairman’s Committee meetings on loans and debt rescheduling.