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International Debt Crisis - Essay Example

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This topic allows the student to investigate one of the instruments used to deal with international debt crisis. The essay can describes the specific mechanisms used in a debt-for-equity swap, emphasizing the advantages and disadvantages of such an instrument to each of the parties involved.
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International Debt Crisis
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Download file to see previous pages These OPEC nations deposited much of their profits in commercial banks.; Sseeking for new investment opportunities, these banks issued loans to developing countries without strictly monitoring how loans were used. Some of these loans loans didn't even not meeting the minimum standard of social, ecological and economic viability; they and only enriched a small group of people such as government officials and small elites.
Meanwhile, extremely tight monetary policies were used to control inflation, which contributed to the rising interest rate, high cost of fuel and world recession, therefore making it . It was difficult for these "Global South" countries to repay their debts., Ssome economists even used the term "'moral hazar"d' for the inadequate effort by these debtor countries to payoff their debts, , which eventually saw the emergence of debt crisis. Debt conversion programs such as "debt-for-development", "debt-for-exports", "'debt-for-exports", "debt buy-back" and "debt-for-debt" were introduced, but it was the "debt-equity swap" which captured most of the attention on the business and financial fields between the 1980s and 1990s.
"Debt-for-equity swaps" was first put forward by Philippines and its importance was growing until the mid-1990s. From 1985 to 1996, "debt-for-equity" net aaccounted for a total of US$38.6 billion and; its priority aim is was restructuring the financial situation to a better position of the debtor countries for long term success. Three parties are involving in such swaps, and they are: the debtor government, the private sector investor1 and the creditor2. Commercial debt and bilateral publicly guaranteed debt are eligible to arrange "'debt-equity swaps"'. , andT the debt conversion proceeds can be converted to cash or, bonds, to acquire the holding of public sector assets or to invest in the private sector, depending on the preferences of stakeholders involved. The private sector investors often act as the "negotiator"; they buy external debts of developing countries at a discount from face value on the secondary market or from a bilateral export credit agency, and then sell them to the debtor governments at the negotiated redeemable price in respective local currencies or local currency instruments3. The private investors will then be able to use the capital to invest in equity shares of domestic enterprises or public assets for the case of privatisation programmes4.
Economically speaking, the amount of welfare gain must be larger than the welfare loss to successfully initiate the "debt-for-equity swap". Investors from the private sector often use the "Net Present Value" of the swap to determine the benefit if striking the deal. It is difficult to measure quantitatively that the exact value of "net" welfare gain, though an analysis on qualitative issues can be conducted through investigating the pros and cons of materializing "debt-equity swap" for each of the parties involved.
For debtor countries, one of the potential advantages of performing the swap is its positive impact on the country's balance of payment by reducing the total debt and future debt service obligations in hard currency. Depending on the overall debt situation and the amount of debt swap, swap may reduce the debt "'overhang"' of a country and improve its pecking order in global financial markets. In addition, the swap encourages foreign capital inflows which may spur the ...Download file to see next pagesRead More
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