The economic changes of the past years in Eastern Europe and
particularly in Bulgaria have created a new environment for the
international business. Despite the serious economic, financial and
structural challenges, Bulgaria's potential for privatization,
industrial modernization and rapid economic growth are
unprecedented.
Bulgaria started the reform process with an enormous external
debt, inherited from the communist regime. Following the moratorium
on the external debt payments of 29 March 1990, negotiations have
been held with the commercial bank creditors for more than three
years. In June 1994, an agreement for a debt and debt service
reduction was signed. It has a special provision for the exchange
of some of the instruments into equity provided Bulgaria
establishes a Debt Conversion Program.
Since the onset of the international debt crisis, various
schemes and innovative financial arrangements have been used by
many countries for the alleviation of the external debt burden.
Debt conversions have had broad applications in the past decade in
Latin America They have emerged as a powerful tool of economic
policy and a viable source of funding for privatization. Swapping
debt for equity became an important policy instrument for many
countries, although, too many flaws do not allow claims for uniform
success. Some countries as Chile and Mexico have provided good
examples of programs that can work to everyone's benefit. The
experience gained so far is an excellent basis for the preparation
of a successful debt-for-equity conversion program for
Bulgaria.
The main purpose of the project is to provide the Bulgarian
authorities with guidelines for a fully-fledged debt conversion
program.
These guidelines are based on the assessment of the
international experience to date and consultations with officials
from countries with successful debt conversion programs like Chile
and Mexico. A comprehensive comparative study of some important
debt conversion programs was carried out in order to answer the
following questions: are they useful, are they necessary, who are
the winners, who are the losers and what are the lessons for the
newcomers. It identified the legal, accounting and tax implications
for foreign investors and how they influence the extent to which
prospective investors were prepared to use the debt conversion
mechanism. This analysis was very useful in providing the necessary
background considerations for the design of a specifically tailored
Bulgarian program.
Drafting the terms of the program meant that Bulgaria's medium
term economic objectives and their implications were identified.
The success of any Debt Conversion program depends on its match
with the relative priorities of the government set up in the
overall macroeconomic development strategy for the country. As it
is a political decision based on the government commitment to
openness and private market development, introducing a DCP has a
direct impact on the country's ability to generate investment
opportunities and speed up privatization. Given the lack of
domestic savings with which to implement the privatization program,
a debt conversion program would promote the required foreign
investment. By offering the means to reduce the external debt, the
program would promote investment, increase the productive capacity,
and provide the basis for export-led growth.
The main task in drafting the guidelines for the Debt conversion
program was to combine the existing legal framework for
privatization with the regulatory framework needed for the debt
conversion, its institutional set-up, and the swap mechanism per
se. Like all markets, the one for debt for equity swaps requires
specific conditions and institutions for transactions, buyers,
sellers, and prices. The program delineates the legal,
institutional, and procedural framework for investment
(privatization) through debt conversion.
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