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WILD COOT: Debt for equity swaps

Harry Russell

WILD COOT: Debt for equity swaps

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Way back in the 1980s and 1990s, debt for equity swaps were popular. They came shortly after the rich banks were liberalized and launched out into the deep.
It was felt that expanding lending to Third World Countries was a good thing. Third World Countries jumped at the opportunity to borrow for projects that made their politicians look good.
Then came the crunch. One oil crisis after another raised the barrel price of oil from US$5 to US$25 to US$80 and so forth – Third World non-Arab countries had to keep their lights burning and their motorcars running.
The end result was that countries started to fail with debt obligations. Jamaica was a case in point. In those days I sought to understand what was happening by writing a series on debt for equity.
When a country could not pay its debt to a bank, the bank placed the debt on the market and tried to get back some of the money. For example, if Jamaica owed bank X US$100, bank X may be prepared to accept US$50 from an international company for the entire debt.
This international company would then go to the Central Bank of Jamaica and demand repayment of the debt but not in American dollars, of which Jamaica would be obviously short. It would demand Jamaican dollars equivalent to US$100. Let us say that at the time the Jamaican exchange rate is $100 to one American dollar. The company would get JAM$10 000, not JAM$5 000.
With this advantage that international company could build a hotel in Jamaica for virtually half of the real cost. Building a hotel is only one example of the serious advantage gained by that international company.
In those days Barbados lost out on many such enticements for international companies and probably building new hotels was one area. Barbados having paid its debts on time and in total did not offer opportunities for debt for equity swaps. Our record was to our disadvantage in that respect.
Investors who came into Barbados did so because we had many ageing companies that sat on large equity without attempting to grow. Again Barbados’ conservatism was to its disadvantage.
Trading on a good name brought us huge sums of money from high-end tourist investors but recurrent expenditure, especially on the West Coast, has now fallen as people with wealth are not so dependable today.
In any case, the world is changing and the rich people may be more interested in the stock and bond markets of Europe and America where the gains are significantly higher than in Barbados.
What little growth exists in Barbados has to pay for the high cost of fuel and food that contributes to the drain on foreign exchange as well as the gigantic effort to continue to pay for loans and service export of profits.
It is a vicious circle. We are now afraid to go to the market to borrow in the face of watchdog rating agencies.
Today we stare into the abyss of devaluation or significant Government-worker layoffs regardless of the plasters we paste on the economy.