Voluntary Conversions of LDC Debt

Abstract

We estimate that out of a total of $23 billion in LDC debt conversions in 1988, there was a reduction of $8.5 billion in foreign liabilities. We argue, however, that the need for debt reduction is not what has been driving these market-based schemes. We think the debt conversions stem largely from the advantages to creditor banks of restructuring their relative exposures given the fact that different banks have different perceptions of return on LDC debt. We show that even without incentive effects on the debtor country, creditor banks will gain from debt-equity swaps, while the debtor country may or may not gain. In contrast, the debtor country will gain from exit-bond exchanges, while the banks may or may not gain.

We thank Ronald Findlay, Przemyslaw Gajdeczka, Michael Gavin, Jorge Gonzalez, Ron Johnson, Bill Lee, Robert McCauley, Ramon Moreno, Steve Peristiani, Rama Seth, Marilyn Skiles, Charles Steindel and participants in the International Economics Workshop at Columbia University and the Friday at the Fed Seminars at the Federal Reserve Bank of New York. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.