By Ishrat Husain, Ishac Diwan
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Extra resources for Dealing with the debt crisis, Part 35
To counteract free-rider problemsthe temptation of individual creditors to avoid new lending and still receive repayments because of lending by othersthe official sector had only moral suasion to ensure that the private sector met the plan's targets. The plan fell short of its targeted net flow, with the contribution of the commercial banks subject to some controversy (see Cline, Shilling, and Husain and Mitra). The banks provided $13 billion in new money but when repayments are netted out, the net flow was only about $4 billion, far short of the $20 billion targeted.
5 billion. Today, most debtor countries, facing fiscal difficulties and inflationary pressures, have become more cautious in their approach to these conversions. Market-based transactions to reduce debt and debt service can be divided into three broad categories: buybacks, exchanges of foreign debt against other foreign assets with different terms, and exchanges of foreign debt against domestic assets. Buybacks. In this type of operation, a country buys back its debt at a discount for cash. Bolivia and Chile are two such examples.
Second, the IFIs could guarantee them. Third, the new asset could be backed by collateral for the principal or for interest paymentsor it could have special conversion rights. To purchase the collateral, the country has to have resources that it can use, or it has to obtain (part of) the resources from other Page 6 sources, such as the IMF and the World Bank, under the Brady initiative. Debt-equity swaps. An investor exchanges a foreign loan for local currency to make domestic investments. When the retired debt is public debt, the government is effectively prepaying its debt in domestic currency, sometimes at a discount Even when private debt is retired, the government loses cash flow, as the debt service would otherwise have been paid to the central bank for later payment (under the terms of rescheduling agreements) to external creditors.