The Federal Reserve Board said yesterday it has loosened rules to make it easier for banks to make debt-for-equity swaps, an important element in the attempt to ease the Third World debt crisis.
With the changes, American banks should have an easier time making investments in companies being privatized in heavily indebted developing countries. The Fed said its rules changes affect only debt-equity swaps in countries that have restructured their debt with foreigners since 1980.
Under such a swap, a bank trades some of the debt owed to it for a share -- usually in stock -- of a state-owned company that is being converted to private hands. Income generated by the company would then flow to the bank.
Lenders and debtors have become more interested in the idea because banks do not want to give new cash to developing nations, which already owe foreigners $1 trillion and are having trouble paying off old debt.
Debt-for-equity swaps have been implemented in some countries, most notably Chile, where such transactions have helped cut the national debt by about 10 percent in the past year. But other nations have fought it, particularly Brazil, where some politicians have argued that the swaps are tantamount to selling off a country's right to self-rule.
The Fed said its change will enable a U.S. banking organization to acquire as much as 100 percent of a foreign nonfinancial company. Under the old rules, banks could not hold more than 20 percent interest in such companies.
The debt-equity swaps must meet several conditions, most prominently:
The company must be in the process of being transferred from public to private ownership. The country involved must be heavily indebted and considered a developing, or Third World, nation.
The ownership interest must be divested within five years from when the shares are acquired. Extensions of up to five years are permissible.