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DEBT/EQUITY CONVERSION FAQ

What is the current situation with regards to debt owed by developing countries?
The poorest countries are caught in a paradox - the more they repay, the greater their debt.By 2015 their debt to export ratio will be three times worse than it was in 1994, rising to over 1000%. More than half of this is bilateral debt owed to other governments, almost a third is owed to international financial institutions, and the remaining 15 percent is owed to private creditors.

Why has the debt risen?
A major reason for the sharp rise in the poorer countries' external debt was the significant decline in the prices for theirb export goods relative to the cost of imports in the mid-1980s, which led to increased external borrowings, IMF officials say. Export earnings have recovered, but the average debt burdens remain very high. Even though three-quarters of the debt is on concessional terms, in 1994 debt service exceeded annual government revenues in 13 severely indebted countries.

What will the effect of this debt be?
The effect of the debts will have serious effects for the affested countries. The United Nations estimates that 21 million children will die by the millennium if debt relief is not accelerated.

What can Governments of richer countries do?
Write off what is owed to them.

What can the International Financial Institutions do?
Write off what is owed to them.

Would this solve the problem?
Not totally, as nearly one sixth of the debt is owed to private creditors.

What can be done about the amount owed to private creditors?
Their debt can be purchased from the private creditors (usually at a discount), in the secondary debt market. The Fund Managers of major institutions in the rich countries could consider using a fraction of the monies under their control to purchase the proportion of the debts owing to private creditors on an ongoing basis and convert them into equity in constructive projects in the indebted countries as part of a debt conversion programme.

What is a debt conversion programme?
Debt conversion programme in individual countries are debt management strategies intended to reduce the country’s external debt stock and encourage foreign capital inflow. Provision is usually made for the repatriation of dividends and capital.

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How do debt conversion programmes work?
The external debt is converted from hard currncies (which individual indebted governments cannot easily access to repay debts, into local currencies which they can access far more readily. The indebtedness of the indebted country is then wiped out as it effectively repays the debt in its local currency. The local currency generated is then used for investment in projects in the previously indebted country. This can be of tremendous benefit to the indebted country.

Which debts are eligible?
Eligible external debts under the programme usually include Promissory Notes and Par Bonds.

What are the benefits to the Financial Institutions who participate in such programmes?
The projects in which they invest can be commercially sound, but which can throw a much needed lifeline to people in the Indebted countries. As the debt can be purchased from private creditors in the secondary debt market at a discount, monies invested under such a programme will go much further in terms of project acquisitions meaning enhanced profitability and higher yields to compensate for the perceived risks in investing in non traditional markets. Another significant aspect is that the cost of investment is discounted as per the individual country risk as the discounted value of the debt instrument being used in the Debt conversion programme are predetermined by global markets. As such, there is a built in compensation for the country risk which should ensure a higher yield.
Help the poor Nations of the World The Church on the Hill
on the hill The Church on the Hill on the hill