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Swaps ease debt but don't solve problem

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Debt-equity swaps have caught the fancy of finance ministers in the third world - and bankers in the first. They are clever ways of taking questionable loans off the books at banks and liquidating small amounts of the massive debt of developing countries. ``But they don't offer a definitive, long-term solution,'' says Javier Murcio, an economist specializing in Latin America with Data Resources Inc. of Lexington, Mass. ``The amount we're talking about is very, very small - a few hundred million dollars in a continent [South America] with billions in debt.''

Latin America's external public-sector debt amounts to more than $370 billion. So far only about $5 billion worth of conversions have occurred.

Still, countries such as Mexico and Chile have found that swaps keep their debt from growing substantially - and they give a morale lift to the debtor nations by at least making it appear that the huge financial burden is being eased. But economists point out that the debt does not vanish. It is transferred from an external debt to an internal one.

In a typical swap, a company buys a third-world loan from a bank at a deep discount. The company then swaps this dollar-denominated IOU with the debtor government for local currency - usually at a favorable rate to the company, provided the money goes to economic development in the country or to buy a state-owned enterprise. The company often must promise that profits will not be taken from the country for five to 10 years.

Part of the third-world country's debt is wiped out, pleasing both the country and the bank. And the company gets an equity stake in the country.

US Treasury Secretary James Baker III and British Chancellor of the Exchequer Nigel Lawson, among others, have endorsed these swaps. Economists generally concur, but with a few reservations.


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