Economic Analysis of Debt-Equity Swaps

The prospects to solve the financial problems of the heavily indebted less developed and developing countries are dim at present. With a few exceptions, these countries face substantial difficulties to pay the interest on their loans, not to speak about repayment of the principal. Apart from debt relief, economic growth of the indebted countries is viewed as the primary means of improving their financial status. Therefore debt-equity swaps (DES) have been greeted with enthusiasm in the financial press as a device to improve economic growth and, at the same time, to reduce the foreign currency-denominated debt of the troubled countries (see e.g. Economist, 1987, Schubert, 1987).