Solutions: the Secondary Market
Debt-for-Equity: Benefits
- Debtor bank sells off a claim for dollars less hard currency (dollars) now needed to pay external debt.
- Foreign Firm has an asset in debtor country.
- CB reduced dollar liability.
- Can induce new investments, finance purchase of existing firms, aid in privatization (ex: in 1990 the Argentine telephone company was sold to groups led by Telefonica and Bell Atlantic).
Debt-for-Equity: Disadvantages
- Inflationary risk: increased supply of local currency
- Demand for Equity investments is unpredictable
- Investment might have taken place anyway
- Exchanged external debt for internal debt: is the rate at which the bank redeems the debt > the cost of the new domestic debt?
- Are foreign firms taking advantage of cheap capital to compete with local entrepreneurs?