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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