- NEW YORK - As creditors and developing nations
grapple with the problems of heavy debt loads, many of them have
been turning to the financial markets in their attempts to avoid
Deals ranging from the exchange of debt for equity to repayment
of debts with commodities are being tested and used widely as means
of cleaning bank ledgers of bad debts and spreading the risks of
Third World financing.
The evolution of the markets for such deals comes as the
developing world's biggest debtors are negotiating for easier
Top finance officials from Brazil spent this past week traveling
to major creditor nations in advance of meetings with its bank
lenders over a refinancing of its $108 billion foreign debt, the
largest among developing nations.
In order to slow the rapid depletion of its foreign currency
reserves, Brazil is seeking longer repayment terms and lower
interest rates like those the banks gave to Venezuela. Venezuela
refinanced its $20.5 billion in debt two weeks ago.
The market for securities backed by a variety of debt has been
growing quickly for the past several years. Banks and non-financial
companies now actively issue billions of dollars in securities
backed by credit card receivables, auto loans and home mortgages.
But the recent flareup in Third World debt problems has prompted
the banks to speed up development of alternatives to simply
refinancing or lending more money.
That development might be hastened by growing discontent with
plans to provide more money to the most indebted nations if they
adopted growth-oriented economic policies.
Critics of the ``Baker Plan'' backed by the Reagan
administration have said that more money was needed than provided by
the plan and that many smaller commercial banks are reluctant to
participate because of the risks of further lending to the Third
Venezuela said this past week it would be more flexible in
allowing one alternative, the debt-equity swap, in dealing with its
In one version of the debt-equity swap, an investor buys foreign
debt in the secondary market. The debt is redeemed into the local
currency, which is used to purchase shares of a domestic business
covered by the loan.
Creditors are able then to wipe the troubled loans off their
books, while the debtors keep vital capital from flowing out of
their borders to meet their payments. Troubled loans essentially
are transformed into speculative stocks, where investors shoulder
most of the risk of repayment.
Debt-equity swaps have been touted by the likes of Treasury
Secretary James Baker and Federal Reserve Chairman Paul Volcker, who
also caution they are just a partial solution.
Such swaps already have been used to some extent in Brazil,
Chile, Mexico, Artentina and the Philippines, Morgan Guaranty Trust
``As yet, the debt-equity swap market remains in its infancy,
mainly because the debtor governments have resisted removal of
regulatory impediments,'' Rimmer de Vries, a Morgan senior vice
president, noted in a recent commentary. …