Abstract

Debt Equity Swaps: Concepts, Application and Problems

Debt equity swaps widen the scope of action of banks and corporations willing to invest and offer considerable advantages over conventional financing techniques. This conclusion, positive from the point of view of individual economic units, is not true in the overall economic perspective. The suitability of debt equity swaps for fulfilling the expectations placed in them, i.e. reducing foreign debts noticeably, stimulating foreign direct investment, repatriating runaway capital and raising efficiency by privatizing nationalized industries in developing countries, is apparently limited. Moreover, they pose grave monetary, budgetary and allocation problems, whose importance has been underestimated so far, that allow an only moderate extent of conversion, if inflation is not to be additionally stoked up and if the national budget is not to be put under further pressure. Growing domestic political resistance to foreign direct investment gives rise to the expectation that the present rate of debt conversion will be slowed as well. In view of these constraints, the best debt equity swaps can be hoped to achieve is to render a modest contribution to getting the acute problems encountered by developing countries under control; moreover, this hope will become reality only if the governments of the affected countries succeed in ensuring political and economic framework conditions apt to regain the confidence of foreign banks and corporations as well as of their own nationals.