Conversion Of Debt Research Articles

Bail in Mechanisms in the Bank Recovery and Resolution Directive

With the adoption of the Bank Recovery and Resolution Directive, Europe has completed one of the three important pillars of the Banking Union. This directive introduces the resolution tool of ‘bail in’ that aims at putting the burden of bank rescue operations with the private sector. Bail outs financed with public money must be avoided, as a result of this new mechanism. The original ideas for contingent capital instruments had been developed by the Bazel Comite on Banking Supervision in 2010, albeit that the concepts of the Bazel Comite aimed at forcing the bank’s shareholders and creditors to contribute to loss absorption exclusively in situations where a bank was beyond a point of viability. The manner in which that concept was described at the time of issue of the report in 2010, suggested that the contingent capital mechanism was particularly to be applied in circumstances where a bank’s operation were still going concern. The European transposition of the ideas of the Bazel Comite has taken place at the level of two different frameworks. On the one hand certain bank regulatory capital providers will be obligated to accept a contingent capital mechanism resulting into write down of debt or conversion of debt to equity if certain regulatory triggers apply. Such regulatory triggers are not necessarily clear evidence that a bank is beyond a point of viability. To the contrary, the trigger as defined in European law suggests that a bank may be financially healthy, albeit that certain constraints in the regulatory capital base became imminent. The other framework where a contingent capital mechanism have been introduced, concerns the bail in mechanism of the BRRD. The distinction between the objectives of the two frameworks is not easy to make. One cannot distinct the contingent capital mechanism in the framework of common regulatory capital rules by stating that it applies only if a bank’s operation is going concern, whereas BRRD only applies when the bank’s operation is gone concern. Both frameworks aim at safeguarding the continued operations of banks. In this working paper we explore further differences and question whether or not the European lawmakers have sufficiently aligned the applicable rules of both frameworks with each other. In the meantime practice develops where it seems that banks aim at issuing debt capital instruments aligned to avoid the application of the BRRD bail in mechanism, by introducing relative high triggers resulting into recapitalization of the bank at a very early stage and prior to recovery or resolution mechanisms become applicable to the bank.

Banking Union Resolution Without Deposit Guarantee: A Transatlantic Perspective on What it Would Take

The project of creating a Banking Union is designed to overcome the fatal link between sovereigns and their banks in the Eurozone. As part of this project, political agreement for a common supervision framework and a common resolution scheme has been reached with difficulty. However, the resolution framework is weak, underfunded and exhibits some serious flaws. Further, Member States’ disagreements appear to rule out a federalized deposit insurance scheme, commonly regarded as the necessary third pillar of a successful Banking Union. This paper argues for an organizational and capital structure substitute for these two shortcomings that can minimize the systemic distress costs of the failure of a large financial institution. We borrow from the approach the Federal Deposit Insurance Corporation (FDIC) has devised in the implementation of the “Orderly Liquidation Authority” under the Dodd Frank Act. The FDIC’s experience teaches us three important lessons: first, systemically important institutions need to have in their liability structure sufficient unsecured (or otherwise subordinated) term debt so that in the event of bank failure, the conversion of debt into equity will be sufficient to absorb asset losses without impairing deposits and other short term credit; second, the organizational structure of the financial institution needs to permit such a debt conversion without putting core financial constituents through a bankruptcy, and third, a federal funding mechanism deployable at the discretion of the resolution authority must be available to supply liquidity to a reorganizing bank. On these conditions, a viable and realistic Banking Union would be within reach — and the resolution of global financial institutions would be greatly facilitated, not least in a transatlantic perspective.

Tax Issues in Consensual Debt Restructuring

The author sets out the key French corporate income tax issues in respect of consensual debt restructurings. Debtors and creditors may be faced with material tax consequences in the case of a debt waiver, debt transfer, conversion of debt into equity or debt buy-back, so that such transactions may require appropriate structuring so as to mitigate potential tax issues.

Exporting the Ownership Society: A Case Study on the Economic Impact of Property Rights

Peruvian economist Hernando de Soto is a favorite of the World Bank, numerous world leaders, and politicians in both parties in the United States. His work has been so influential that he has been considered for the Nobel Prize in Economics. Perhaps de Soto's prescription for the ills of developing economies is so influential because it seems so simple. He claims that if poor people in the Third World are given formal title to the assets they currently hold extra-legally, they will be able to generate capital, the surplus value that produces wealth. This article raises some cautionary notes, concluding that things are not so simple. It examines whether poor people who have formal title to their homes in the US, the country de Soto uses as his paramount example, experience the benefits that de Soto attributes to formal ownership. The article finds that the expansion of the ownership society to include the poor does produce many of the benefits de Soto claims. The greatest benefit is increased access to the markets for both residential real estate and mortgage loans. However, much of the wealth accruing from poor people's participation in these markets goes to market participants other than the poor. For example, many poor homeowners who seek to enhance their wealth by accessing more credit are victimized by predatory lenders who capture the wealth. For many also, the conversion of debt into long-term improvement of welfare is an uncertain and difficult process. For those who epitomize de Soto's hypothesis by using their formal title as an aid in starting small businesses, the path is especially complex and uncertain. In the end, there is no clear connection between property formalization and greater social welfare. This lesson in turn provides useful information about what it is reasonable to expect from rule of law reforms.

Motives behind equity holding by banks: Evidence from India

This paper examines the motives behind equity holding by banks in non-financial firms. It has been argued that banks hold equity in firms primarily for two reasons: to support their debt holding or for returns as capital investments. This paper tries to examine which among these two motives drive equity holdings by Development Financial Institutions in India (DFIs). Results indicate that equity holding by DFIs in India is primarily driven by their interest as creditors. In poorly performing firms, equity holding by DFIs is also driven by debt restructuring in firms in the form of conversion of debt to equity.

Debt Conversion Programmes and Investment — Applying the Latin American Experience to Russia

Following the tragic events of September 11 in the US, and the very cooperative response of President Putin, there is a clear window of opportunity for Russia to become more closely and more rapidly integrated with major OECD economies. This means in particular a real possibility to proceed much more quickly than anticipated with accession to the WTO and into some kind of specific trade agreement with the European Union. This also means a willingness from the West to be more open than in the past on such issues as management of Russia's Paris Club debt. Against this background, there is a renewed interest in conversion of debt into investment, which would significantly help Russia to foster foreign direct investment at a time when the country must greatly increase its competitiveness.

Princípios gerais do direito contratual aplicáveis à dívida externa dos países em desenvolvimento

Os princípios gerais de Direito apresentam-se com força normativa nos sistemas jurídicos contemporâneos, porque encontram seu fundamento, sua força, principalmente, no Direito Natural. Por essa razão, esses princípios devem ser observados nas contratações, seja no âmbito nacional, seja no internacional, sob pena de desequilibrarem-se as relações jurídicas. Assim, salientam-se o princípio da boa-fé, também objetivamente considerada, o da liberdade contratual, para maior justiça nas negociações, e o da função social do contrato, como meio justo de entendimento entre os homens. Também, destaca-se o princípio da comutatividade dos contratos e da eqüidade, para que as partes sejam iguais, no tocante às prestações devidas. Daí, o princípio da cláusula rebus sic stantibus, que, considerada imanente em todos os contratos, autoriza sua resolução; portanto, independentemente de culpa, desde que se desequilibrem as posições das partes, em razão de fato imprevisto, imprevisível e extraordinário, com prejuízo maior de um dos contratantes, dá-se a resolução. O contrato, desse modo, torna-se muito oneroso a uma das partes. Todavia, em regime inflacionário, a inflação não é imprevisível, o que dificulta a aplicação dessa teoria da imprevisão. Daí, o resumo de nossa proposta: a. Aplicação, pura e simplesmente, da teoria da onerosidade excessiva, causadora de lesão, independentemente da teoria da imprevisão ou da cláusula rebuc sic stantibus. O simples desequilíbrio contratual, objetivamente considerado, causa a necessidade de revisão contratual, com a conseqüente reposição ao statu quo. b. Impossibilidade de alteração unilateral, pelos credores, das taxas de juros, sob pena de atuação abusiva e mesmo ilícita, causando a nulidade dessa modificação realizada sem o mútuo consenso dos contratantes. c. Necessidade de respeitar-se, quanto aos débitos dos contratos existentes, o parecer da Corte Internacional de Justiça de Haia, a que deve ser submetida a questão sobre a dívida externa dos Países em desenvolvimento, ou, se for o caso, o parecer da Organização Internacional do Trabalho (OIT). d. No tocante aos contratos futuros, necessidade de inserir, neles, cláusulas de arbitragem, escolhendo, de preferência, o árbitro e seus eventuais substitutos, em ordem cronológica, na cláusula contratual. Esse árbitro deve ser, de preferência, a Corte Internacional ou outro Órgão equivalente. e. Incentivo aos Países em desenvolvimento à implantação de projetos de conversão da dívida externa de natureza ecológica. Deve, assim, existir uma compreensão geral dos credores dos Países em desenvolvimento para que a humanidade cresça e se espiritualize, na idéia da construção de um mundo novo, fraternal e amigo, em que a matéria seja secundária nos projetos de aprimoramento da cultura dos povos, da justiça social e do bem-comum.

Current Policies Aimed at Attaining a Model of Sustainable Development in Brazil

This paper outlines Brazil's current efforts to develop a model for sustamable development. Present and future efforts within the energy, timber and agricultural sectors are combined with a new program of ecological-economical zoning. This policy framework seeks to balance the need for economic growth and enhancement of quality of life with environmental protection. Brazil's Plan for Conversion of the External Debt for Environmental Ends is also presented.

Conversion of Official Bilateral Debt: The Opportunities and the Issues

The level and structure of external debt limit the growth prospects of many severely indebted low-income and lower-middle-income countries. Because many of these coun­ tries owe a large proportion of their external debt to official creditors. mechanisms such as debt conversion can be useful in reducing their debt overhang; important efficiency gains can be achieved if the use of local currency linked to the debt reduction is productively channeled. This paper examines the lessons learned from swaps of com­ mercial debt and evaluates the potential benefits and costs of swaps of official debt. For debtors. the potential benefits associated with a reduction of debt include an improved climate for domestic and foreign direct investment. a transfer of risk to foreign inves­ tors. and access to a source of additional capital for privatization. as well as additional external funding for social programs. The problematic effects include the risk of infla­ tion. For creditors. debt-for-equity and debt-for-development conversions are one way to help countries achieve long-term financial viability and at the same time prompt them to undertake socially desirable programs. The paper also addresses technical issues. such as transparency of operations. ownership of converted claims. and the need for financial intermediaries.

Comment on “Conversion of Official Bilateral Debt: The Opportunities and the Issues,” by Stephany Griffith-Jones

Comment on “Conversion of Official Bilateral Debt: The Opportunities and the Issues,” by Stephany Griffith-Jones

Statistical Issues of Debt Conversions

This paper examines two aspects of debt conversions. First, it examines general aspects of secondary markets of developing countries` bank debt, and the debt conversions that have taken place in a number of developing countries experiencing debt servicing difficulties. Second, by using common characteristics of debt conversion transactions, the paper analyzes the effects of debt conversions on monetary, balance of payments, and fiscal accounts in the debtor countries. It concludes with discussions on implications of debt conversions for reports of external debt statistics.

Statistical Issues of Debt Conversions

Statistical Issues of Debt Conversions

The conversion of foreign debt viewed from Latin America

Conversion of foreign debt is an econom ic policy instrument of both positive and negative potential for the regional economy. The positive potential includes reduction of the cumulative value of the debt and of the interest payments, improvement of the financial situation of enterprises, repatriation of fugitive capital, and direct foreign investment in priority sectors. The negative potential includes a net adverse effect on the balance of payments, increased inflation resulting from increased issue of money, denationalization of the economy using subsidized capital, and crowding out in the use of foreign exchange. The final mix resulting from conversion is determined mainly by the modalities with which this tool is used.

Debt Conversions: Economic Issues for Heavily Indebted Developing Countries

This paper is a general discussion of debt conversions in heavily indebted developing countries. The paper first describes the three different types of transactions that are commonly called debt conversions. Next the paper discusses programs that have been established in Chile, Brazil, Mexico, Argentina, and the Philippines to facilitate these transactions. Then the different ways in which commercial banks can participate in these transactions and the volume of these transactions to date are discussed. The paper concludes with a discussion of a broad range of economic issues raised by these transactions, including: the effect of debt conversions on the structure of debtor countries' external liabilities, the incentives debt conversion programs provide for net new capital inflows, the macroeconomic effects of these transactions, and the new role for debt swaps programs in the so-called "menu-of-options" approach to restructuring developing countries' bank debts.

The Conversion of the English Debt

The Conversion of the English Debt