On the determinants and resilience of bond flows to LDCs, 1990-1995: evidence from Argentina, Brazil and Mexico

Bond flows to Less Developed Countries (LDCs) proved more resilient than expected to the rising U.S. interest rates during 1994, raising hopes that the current episode of private capital flows to LDCs may not end in a widespread crisis as its predecessors in the 1920s and 1970s did. This paper attributes the surprising resilience of the flows to the fact that global bond issuance was a significant determinant of them, independently of U.S. (and world) interest rates. Briefly, global issuance, which recovered quickly from the shock of the first interest-rate rise in February 1994, helped offset the adverse impact of the rising interest rates. The paper also documents the existence of some speculative component in the flows and of regional contagion effects, both of which warn of a possible crisis in the future. Compared with previous studies, the paper identifies an additional determinant of bond flows, i.e., global issuance, documents a remarkable stability of the estimated coefficients during the period of rising interest rates and in the aftermath of the "Peso crisis," and makes a better assessment of the impact of global and country-specific determinants for each sample country.