Debt-equity swaps: Panacea or the emperor's new clothes?

Among recently discussed financial innovations aiming at facilitating financial problems of developing countries debt-equity swaps (DES) have received considerable attention and have been greeted by some advocates with enthusiasm (Fierman 1987, Rundt 1986). This paper analyzes how debt-equity swaps can be of benefit to highly indebted developing countries. In particular, it will be analyzed whether these swaps can be implemented without harming old creditors and thus hampering new lending. If this condition is fulfilled, swaps possibly provide an exit option for individual banks from syndicated rescheduling and thus might facilitate rescheduling negotiations through a reduction of the number of participating banks. The paper is organized in four chapters. Following the introduction, chapter II provides a general description and some background on the implementation of debt-equity swaps. Chapter III tries to set up a framework for the analysis of benefits and costs associated with these swaps, as they are suggested in the literature. In chapter IV, this conceptual framework is used for a general evaluation as well as some concluding remarks are provided.