The Package Makes the Deal: Sovereign debt crisis and lending strategies of Lloyds Bank International in Latin America, 1975 – 1983
This paper 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, behind US, banks were the second most important player 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 between 1975 and 1983. 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.
