Newspaper article THE JOURNAL RECORD

Many Nations Turn to Financial Markets for Assistance

Newspaper article THE JOURNAL RECORD

Many Nations Turn to Financial Markets for Assistance

Article excerpt

- 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 fiscal disaster.

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 payment terms.

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 World.

Venezuela said this past week it would be more flexible in allowing one alternative, the debt-equity swap, in dealing with its foreign debts.

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 Co. reports.

``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. …

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