What's the cheapest way to borrow $9 billion?
This is the problem faced by the World Bank, the largest nongovernmental borrower in the world, which is just beginning to finance its fiscal 1983 budget.
According to Eugene Rotberg, vice-president and treasurer of the bank, the institution, for the second consecutive year, will borrow some of its funds in the US markets. Instead of borrowing long- or medium-term funds, however, the bank will concentrate its borrowings in the short-term sector of the markets. It will continue to borrow the bulk of its medium-term funds in foreign currencies, where real interest rates are lower.
Last year, for the first time in four years, the bank borrowed $1.5 billion in medium-term funds in the US markets, borrowing the rest of its $8.5 billion overseas. According to a bank source, it may have remained out of the US markets too long and was in danger of losing its identity here.
The bank's strategy over the past five years has been mainly to borrow Japanese yen, Swiss francs, and West German marks. As Mr. Rotberg pointed out when he was in New York recently, in the late 1970s and early '80s the bank considered the dollar to be a strong currency, while the others would be weak.
This theory paid off handsomely for the bank. It was able to greatly reduce its interest cost by borrowing in the weaker currencies. For example, its effective borrowing cost over the past five years for its Swiss franc debt has been 3.42 percent; for German marks, 4.92 percent; and for Japanese yen, 6.68 percent. The exchange rate gain - as these currencies weakened, making it cheaper to pay them back - was $2 billion over the past four years. Had the bank borrowed the equivalent amount ($17 billion) in dollars, the effective interest rate would have been 11.36 percent. Altogether, for the past five years the bank has borrowed $17 billion, mainly in foreign currencies, at an average cost of 7. 33 percent.
The bank will stick to its strategy of mainly borrowing in foreign currencies , Mr. Rotberg said, because there is about a 6 percent differential between US and foreign interest rates. He said he didn't think the dollar would revalue enough to make borrowing in US dollars worthwhile. But he indicated that there is enough uncertainty in the world markets that the bank wanted to borrow some US dollars - but not at 15 percent. Thus, it will borrow short-term dollars.
Since the bank will be relending these to developing nations for the long term, it is changing the terms of its loans. It will now charge a variable interest rate, which will be changed every six months.
To figure out the floating interest rate, the World Bank will place $8.5 billion of current loans into a ''pool.'' The combined interest rate on this pool, with 1/2 of 1 percent going to the bank as its profit, will be 10.93 percent. This is the interest cost that will be charged borrowers for the next six months. As new funds are borrowed, they will be placed in the pool. At the end of three years, the original $8.5 billion will be removed from the pool. Since the bank intends to borrow $9 billion to $10 billion for the next several years, it won't take long to develop another pool. Currently, the bank has $11 billion in loan commitments it will make over the next 12 months.
On its $31 billion in outstanding loans, the bank recorded a profit last year of about $600 million. Mr. Rotberg points out that it has never suffered a loss on any of its loans. Nearly all of them are for specific projects which undergo detailed analysis before approval. Although the bank has a significant equity base, some 80 percent of its lending is funded through borrowing.
Harry Taylor, the executive vice-chairman of Manufacturers Hanover Trust Company, says loan demand at his bank is 20 percent higher than it was a year ago. He attributed the strong demand, in the middle of a recession, to the absence of any buyers of long-term debt - and the subsequent drought in the long-term bond markets. He also noted that some corporations are in the middle of capital spending projects and must continue them, while other companies are borrowing simply to survive.
Mr. Taylor also said he felt it ''would serve no useful purpose'' for the international banks that have lent money to Poland to declare the country in default on its loans. He said he was ''slightly more optimistic'' since the Polish government said it wants to get its economy moving again and repay its loans. He indicated that banks might be willing to relend to Poland on a short-term basis to allow the Poles to get their economic production started again.