Abstract

The debt-equity swap is a mechanism by which a bank exchanges foreign sovereign external debt of a debtor country for an equity stake in a company in that country through privatization, stock market investment, or direct investment. That is, a bank holding debt has three choices. It can (1) continue to hold the debt, (2) try to sell it in the secondary market, or (3) swap it, either for debt of another country or for an equity stake. By using the debt-equity swap, a bank can sell its debt to Coca-Cola or another multinational that—rather than make a direct investment in, say, Brazil—buys the debt at a discount. The size of the discount varies. Following a moratorium, Brazilian debt traded at about 25 cents on the dollar.