The Market’s Response: Debt Swaps

Abstract

Until the emergence of the debt crisis in the 1980s the lending banks saw their loans to LDCs as investments which would be held to maturity. There was no widespread secondary market in such loans. Yet in the period 1983–7 it is estimated that around $15 billion of such loans had been swapped for other forms of investment in LDCs. For 1987 alone it is estimated that swaps of debt for equity were over $6 billion. This is expected to rise dramatically in the late 1980s. The spate of reschedulings and the interruptions to debt service which occurred in the years following led to a lengthening of average loan maturities and a deterioration in the quality of the loan portfolios of international banks throughout the world: the proportion of international banks’ assets in London with over three years to maturity rose from a constant 13.6 percent for the period 1977–82, to 16.7 per cent in 1983 and 17.4 per cent in 1985, reflecting the loan rescheduling arrangements. We saw in Part Two that rescheduling arrangements typically lead to grace periods of several years prior to repayments commencing, with the repayments being stretched out over a longer time-period. A number of European and regional US banks which were not overly committed either in their loans to LDCs or to future profitable domestic business within the LDCs preferred to offload their loans rather than hold them to maturity.