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Aleksanteri Papers 4:2000

Aleksanteri Papers Nadezhda Ivanova:
Long-term borrowing in international and domestic finance markets


The paper deals with and assesses long-term and short-term borrowings in the international and domestic markets. The first part of the work presents a study of municipal debt: bonded and credit financing in the international and domestic markets. As the international market 1 the Euromarket is considered, and as the borrower — Administration of St.-Petersburg City regarded as a subject of Russian Federation.

The purpose of the present study is to determine and carry out a comparative analysis of cost of the alternative methods of financing applied by the Russian borrowers, and to reveal economic forces that have an effect on the cost. Here we use an ex post analysis. In the second part of the study, we shall consider not only municipal borrower, but also any borrower, who comes to the international and domestic financial markets. Further we shall present the change in interest rates and exchange rate as a function, and that will permit us to forecast the changes in these values for some time ahead.

The changes in the economy of our country enabled the Russian borrowers to expand the money market and the financial market, gave access to the international markets. Various forms of financing became available to the borrowers, thus permitting them today to select the method of attraction of money resources would require the lowest costs.

There are two types of financing, i.e. from a bank and from sources other than banks. By selecting the method and the tools for attraction of money resources, the borrower orients himself with respect to the cost of the loan. In case of bank crediting he is interested to know what is the interest rate under the credit, and in case of non-bank borrowing the yield of the bonds is important as well as the cost of accommodation. The borrower compares the complete costs of these two types of financing and decides on the most favourable currency for attracting the money. Proceeding from this, he goes to the domestic or international markets.

The study covers the period from middle 1994 to August 1998, and the changing situation in the economy of Russia over that period. The beginning of that span of time may be characterized as the period of financial market coming to be and unstable economic situation in country, the middle — a comparatively stable state with low rate of inflation and controlled exchange rate, and since 1997 activity in the financial markets of the country had been fading, that process being accompanied by collapses of the capital market and shocks in the bank system.

In this paper we also consider a concrete example of municipal Eurobond issued by the city of St.-Petersburg in June 1997 and study value of a loan in a domestic market and of Eurocredit. The analysis of the finance-credit market gives a clear idea of the particular features of position of Administration of St.-Petersburg as concrete borrower. The internal debt of the city as at 01.01.1998 is 2,289,400 thousand rbl. (Municipal Short Bond, MSB— 1,915,000 thousand rbl.), the external debt as at the same date is 1,768,600 thousand rbl. At the end of the year these parameters are expected to be respectively 2,031,186 (MSB — 1 822 100 thousand rbl.) and 2,026,814 thousand rbl. We therefore see that during this year the structure of borrowing will change, and by the beginning of 1999 the volumes of money resources of external and internal financing will be approximately equal.

After the city administration will have selected the target structure of the debt, they will have to determine the best way to attract the money. It will be necessary to decide as to the market (the national market or Euromarket) and the money attraction instruments to be used. The administration of city can obtain a money credit from financial institutions in the internal or external money markets, or either issue bonds in the internal financial market or Eurobonds in the external. In the paper we discuss in detail the characteristics and particular features of each of these methods, study actual concrete issues of the bonds and eurobonds of the St.-Petersburg city and compare these with hypothetical credits, which could be obtained by city during the period in question, proceeding from the market conditions.

Among such factors we rate the reasonable expectations of the economic agents concerning the future rates of the exchange and interest rates, and effect of these expectations on the cost of long-term financing, effect of currency policy.

Full text: Long-term borrowing in international and domestic finance markets (pdf)