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In their case we propose a large-scale 50% conversion of debt for Millennium Development Goals financing programs. We are not asking for debt forgiveness or debt cancellation. What we propose is that the debt service or principal amount should be converted into equities in new projects of at least equal value and with their own potential earnings.
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Philippine president Gloria Macapagal-Arroyo (on the country’s Millennium Development Goals)

Introduction

What is it?

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Definition:
(exchange of debts), an exchange of financial obligations, especially between corporations or governments, in order to gain profit or a mere convenient repayment schedule. It occurs because of necessary financial restructuring for long-term success. There are two types of debt swap there is a debt/equity swap or an equity/debt swap.


  • Equity/Debt Swap - shareholders are able to trade their stock for an amount of debt (bonds) in the same company
  • Debt/Equity Swap - debt exchange for equity (stock)

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The value of the swap is determined usually at current market rates, but management may offer higher exchange values to entice share and debt holders to participate in the swap. It is a set of transactions where a firm buys a country's dollar bank debt at a cheaper price and this swaps this debt with a central bank for local currency that can be used to gain local equity.
  • The US, in collaboration with other countries have formed the TFCA, where countries may swap their debt to the US in exchange for an agreement to preserve rainforests and wildlife in their country.
  • Seen as a way to reduce loads to developing countries
  • Debt swaps can encourage privatization of companies that are burdens to the government
  • Debt swaps can bring new investment to third world countries
  • However, debt swaps can cause a focus solely on repayments with money from investment instead of the improvement of the country as a whole. As a result, countries suffer in any kind of development
  • Debt swaps within businesses can cause economic development as new investors come into the country because the businesses are attractively priced
  • Debt Swap is now a thriving business in third world countries, bringing in more economic wealth.

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What issues was it created to solve?
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  • The Argentinean debt crisis has implemented this tactic to attempt to ease the strain on its economy. The countries debt has remain un-changed
  • It was created first by companies whom needed to change their internal financial structure, and to make shareholders satisfied
  • Countries often swap their debt with other countries for things such as medical programs (Indonesia) or other relief based programs
  • Alleviation of debt held by certain countries, such as Indonesia

What are the outcomes ?
Since there are only two types of debt swap, being equity/debt swap or debt/equity swap, naturally there are only two solutions. In an equity/ debt swap shareholders can trade their stock for an amount of debt also known as bonds in the same company. This means they trade their stock for money to get out and not play the market and gamble. In a debt/equity swap debt is exchange for equity or also known as stock. This means the person is getting into the market.


When was it initiated or what was the event that initiated it?
From the late 1980s through the mid-1990’s debt swap emerged to towering heights all over the world. UNICEF demonstrated that close to $200m in debt can be retired, while generating around $50m in additional funds. From this experience records show that 4 countries in sub Saharan Africa, 4 in Latin America and the Caribbean, and 1 in East Asia benefited from debt swap-funded programmes for children across 4 sectors – education, water/sanitation, health and nutrition.


The Way We See It
Regardless of recognizing the immense benefits of debt swap, it is key to note that there may be some negative factors as well. This includes the lack of discounted debt for swap, and the lack of fiscal resources on the part of a beneficiary government. Moreover, society is not greatly informed of debt swap, as several swaps are left unevaluated on the basis of how specific social goals can be achieved. Essentially, it is critical to avoid or reduce increasingly growing debt because at one point it becomes too difficult to obtain debt relief. Debt swap is one of the solutions for heavily indebted countries, however it would be wise to implement various debt relief policies to efficiently reduce debt.


Bibliography


  1. Suharmoko, Aditya. "RI pursuing debt-swap mechanism." The Jakarta Post. 24 June 2008. PT Bina Media Tenggara. 12 Nov. 2008 <http://www.thejakartapost.com/news/2008/06/24/ri-pursuing-debtswap-mechanism.html>.
  2. Valente, Marcela. "Argentine: What Comes Next After the Debt Swap?" Latin America News Review. 24 Feb. 2005. Blogspot. 13 Nov. 2008 <http://lanr.blogspot.com/2005/02/argentina-what-comes-next-after-debt.html>.
  3. "What is debt/equity swap?" Investopedia - A Forbes Digital Company. Investopedia ULC. 11 Nov. 2008 <http://www.investopedia.com/ask/answers/06/debtequityswap.asp>.
  4. "Working Group on Debt Swaps for Education." UNICEF. UNESCO. 12 Nov. 2008 <http:/www.unesco.org/education/efawgsde/efawgdse_2nd_presentationunicef_en.pdf>.

Graphic Sources//
  1. "Darling Let's Get Deeply Into Debt." Flickr. 2 Aug. 2008. Yahoo Company. 11 Nov. 2008 <http://www.flickr.com/photos/whinendine/2725767869/>.
  2. "NYC National Debt Clock." Flickr. 24 May. 2006. Yahoo Company. 11 Nov. 2008 <http://www.flickr.com/photos/wallyg/152453473/>.

Video Sources

  1. "Bank of England Facilitates Debt Swap." YouTube. 21 Apr. 2008. LLC. 12 Nov. 2008 <http://www.youtube.com/watch?v=fk7fz2gka5k>.
  2. "Third-World Debt: 6 Reasons to Drop It." YouTube. 25 Mar. 2008. LLC. 12 Nov. 2008 <http://www.youtube.com/watch?v=v2rnv6yxhge>.

Personal Thoughts
  1. I feel that a equity/debt swap is kind of a rip off because once you trade your shares you are out and there should be other alternatives. Also It seems as though people give their money to take shares or a company or place that is in debt and your gambling that countries future.


By: Zeehan Rahman, Nicole Chin, David Black, Jon Hollingsworth