The so-called "swap operations" provide
opportunities for discount acquisition of debt instruments on the
international financial markets and their exchange for investments
at a value equal to the debt obligation.
Such operations became largely popular in
Argentina, Brazil, Chile, Equator, Mexico, The Philippines,
Nigeria, Venezuela.
Bulgaria is the only country in Central and
Eastern Europe to allow the use of foreign debt bonds in
privatisation. It is a challenge to introduce a debt-for-equity
swap mechanism in a country which is in transition from a centrally
planned to a market economy, because of the unique nature of this
transition. Of course, it is being carried out based on the
considerable experience and analyses of the effect of the
debt-for-equity swaps in some countries in Latin America and
Africa. The Bulgarian experience is quite modest, since the legal
framework of such swaps was enforced only in December 1994.
Nevertheless, this short period is sufficient to make an assessment
of both the initial and possible effects of the partial exchange of
the foreign debt for equity on privatisation. The swap operations
are not only a debt management instrument but also an acceleration
mechanism for denationalisation.
The current study analyses the positive
effects and the problems with the foreign debt exchange as well as
their implications for the parties involved in swap operations.
Some recommendations based on this study will be made to the policy
makers.
CHAPTER I : BULGARIA FACES A SERIOUS
DEBT CRISIS
Bulgaria is not among the countries with the
largest foreign debt but the parameters of the obligation are quite
unfavourable. Unfortunately, the serious debt crisis has been
underestimated and this issue was not given priority in the
programs of any government so far. The understanding of the
seriousness of the crisis is an argument for the introduction of
debt-for-equity swap schemes as a possible approach to at least
partial reduction of the foreign debt burden.
A standard classification of the World Bank
for the 1970-1993 period puts Bulgaria in the group of countries
with the largest debt per capita, together with Poland, Mexico,
Brazil, etc. All three basic coefficients (GDP per capita, foreign
debt/GDP, foreign debt/export) are above the critical level for
these countries during the 1991-1993 period. The debt coefficients
for 1990-1994 are shown in Table 1, the calculations for
1994 and 1995 being made by the authors of this study.
Table 1
|
1990
|
1991
|
1992
|
1993
|
1994
|
Foreign Debt/GDP |
57.0%
|
124.3%,
|
118.3%
|
124.9%
|
112%
|
Foreign Debt/Export
|
239.3%
|
330.7%
|
281.8%
|
235.6%
|
231%
|
Interest Payments/GNP
|
2.7%
|
1.6%
|
2.4%
|
2.6%
|
3.95%
|
Interest Payments/Export
|
11.2%
|
4.4%
|
5.8%
|
4.9%
|
8.2%
|
Source: World Debt Tables, Vol. 2, 1994-1995, The World
Bank.
Note: Because of lack of GNP data, 1994 coefficients and
1995 forecasts are based on GDP.
The amount of the foreign debt
includes the restructured obligations to the London Club, the
obligations to Russian and Polish banks not included in the
agreement with the London Club, the obligations to the Paris Club,
the World Bank, the IMF, and the EU.
The amount of the 1994 interest
payments includes buy-back (7.327 mln.), partial payment in the
final period (.030 mln.) and down payment (.704 mln.).
The dynamics of the relative foreign debt
indicators in the table is related to the deterioration of the
economic environment in the country rather than to a considerable
increase of the foreign debt. One exception is 1994, when
the rescheduling and reduction of the debt on the one hand and the
better economic results on the other lead to slightly lower foreign
debt/GDP and foreign debt/export ratios.
An analysis of the economic and foreign debt
indicators shows that Bulgaria has smaller potential to service its
debt in comparison to Poland and Hungary.
Table 2
Economic Indicators, average for
1992-1995.
(in US$ billion)
Macroeconomic
indicators |
Poland
|
Hungary
|
Bulgaria
|
Russia
|
Real GDP |
4.3%
|
-0.8%
|
-2.1%
|
-13.4%
|
GDP |
|
|
|
6
|
- per capita |
2,420
|
3,740
|
1,1130
|
1,390
|
Inflation (Yr.-Yr.)
|
34.4%
|
22%
|
87.6%
|
881.3%
|
Credit
coefficients |
|
|
|
|
Current account (% of
GDP) |
-1.5%
|
0.2%
|
-2.1%
|
1.6%
|
Budget deficit (% of
GDP) |
-3.3%
|
-5.7%
|
-5.8%
|
-7.4%
|
Debt/GDP |
47
|
65
|
127
|
54
|
Debt/Export |
282
|
202
|
307
|
195
|
Debt service coefficient
|
17
|
41
|
21
|
17
|
Source: Salomon Brothers, Emerging Markets Research,
Biweekly, April 5, 1995
The abilities of Bulgaria to service its
foreign debt are limited, so are the prospects of doing this. In
this respect, the inevitable exchange is one of the important
mechanisms for relieving the debt burden. In other words, from a
fiscal point of view it is justified to have a balanced program for
partial exchange of the foreign debt for equity.
The suspicion and the political arguments
connected with the swap operations are based on the assumption that
the Brady bonds users buy Bulgarian property cheaper and this
indirectly lowers the degree of public support for privatisation.
This media insinuations do not take account of the direct effect of
the exchange on the budget and its indirect influence on the
general recovery of the economy. The "lower" price which Brady
bonds users pay is offset by the reduction and rescheduling of the
debt, i.e. while an individual buyer may profit, the state does not
lose. On the other hand, since the swap operations are available to
foreign and domestic persons, both of them may profit.
The third fact which is being underestimated
by the critics of the debt-for-equity swap in Bulgaria is that it
is a part of the debt agreement and in this sense it was a part of
the prerequisites for signing of the latter. This means that the
scope of the debt-for-equity swap cannot be infinitely limited
because this will put under question the conditions of the
agreement with all the dangers involved.
Finally, the Bulgarian bonds are not
particularly attractive and they have to be made such, which
depends to a large extent on the swapping possibilities. As the
analysis in Chapter II shows, the prices of the Bulgarian
foreign debt are quite unstable and their level suggests that they
are not very attractive.
CHAPTER II: FLUCTUATION OF BULGARIAN
DEBT PRICES AND FACTORS INFLUENCING THEM
The current Chapter is devoted to the
relation between the foreign debt price and the exchange rate as
macroeconomic variables indicating the situation and the rates of
development of the national economy and comparing them with those
of the world economy. If the hypothetical relation between debt
price and exchange rate be proven, this will confirm the assumption
that in Bulgaria the fluctuation of this macroeconomic factor
determines the decisions of the participants on the debt market. On
the other hand, the lack of such a relation will lead to the
conclusion that the fluctuation of the exchange rate does not
influence the price of debt bonds and another variable has to be
found to account for the tendency in their change. The validity of
the hypothesis will be proven by a descriptive analysis of the
dynamics of the exchange rate and foreign debt price.
The analysis begins with an overview of the
dynamics of the exchange rate by years. When comparing the
fluctuations of debt prices and the USD/BGL rate, the analysed
period is further divided into two subperiods, where the natural
division line is drawn by the moment of signing of the Brady
agreement with the creditor banks, which changes the structure and
the levels of the debt price. The exchange rate curves and the
levels of the Bulgarian foreign debt for the two subperiods are
shown in Chart 1 and Chart 2, while the actual levels
are evident from Table 3 and Table 4.
Table 3
BULGARIAN FOREIGN DEBT
PRICE 1992 -1994
(in US cents)
Date
|
Price
|
Exchange Rate (lv/USD)
|
92q1
|
18
|
23.281
|
92q2
|
17
|
23.021
|
92q3
|
16
|
22.636
|
92q4
|
13
|
24.492
|
93q1
|
14
|
26.522
|
93q2
|
21
|
26.681
|
93q3
|
26
|
28.026
|
93q4
|
41
|
32.711
|
94q1
|
35
|
64.942
|
94q2
|
48
|
53.650
|
94q3
|
45
|
61.201
|
Chart 1
BULGARIAN FOREIGN DEBT PRICE AND
EXCHANGE RATE
JANUARY 1992 - SEPTEMBER
1994
Source: BNB, "Informational bulletin"
Table 4
BULGARIAнS BRADY BONDS
FOREIGN DEBT PRICE 1994-95
(in US cents)
DATE
|
Dbs (asked)
|
Dbs (bid)
|
FLIRBs (asked)
|
FLIRBs (bid)
|
Exchange rate
(lv/USD)
|
PDI
|
July 01
|
43
|
42.5
|
19.75
|
19
|
53.691
|
34
|
July 04
|
48.
|
46.5
|
25.75
|
23.5
|
53.8
|
40
|
July 07
|
48.5
|
45
|
24
|
23.5
|
53.845
|
39
|
July 10
|
47
|
48
|
24
|
23.38
|
53.901
|
39
|
July 19
|
47.75
|
47.38
|
24.13
|
23.5
|
53.644
|
38
|
July 21
|
47.5
|
46
|
23.75
|
22
|
53.628
|
38
|
July 26
|
45.5
|
42.25
|
22
|
19.5
|
53.47
|
35.25
|
July 27
|
45.5
|
42
|
22
|
19
|
53.472
|
35.25
|
Aug 05
|
43
|
41.75
|
19
|
17.25
|
53.363
|
33.25
|
Aug 08
|
43
|
41.75
|
19
|
17.75
|
53.518
|
33.88
|
Aug 16
|
46.26
|
45.75
|
21
|
20.25
|
54.686
|
37.25
|
Aug 18
|
50
|
49.13
|
23.5
|
23
|
56.037
|
43
|
Aug 23
|
47.88
|
47
|
22.5
|
21
|
56.128
|
41.75
|
Aug 25
|
48.13
|
47.5
|
22.38
|
21.63
|
56.363
|
42.5
|
Aug 30
|
48.38
|
47.63
|
22.25
|
21.25
|
57.403
|
43
|
Sept 01
|
47.88
|
47.5
|
22.25
|
21.75
|
57.243
|
43
|
Sept 02
|
48.63
|
47.88
|
22.75
|
22.25
|
57.588
|
43.25
|
Sept 07
|
48.25
|
47.8
|
22.25
|
21.69
|
60.786
|
43.38
|
Sept 08
|
48.25
|
47.63
|
22
|
21.38
|
61.135
|
42.25
|
Sept 09
|
49.13
|
48.75
|
22.5
|
21.75
|
62.023
|
44.25
|
Sept 13
|
48.63
|
48.13
|
22.38
|
21.88
|
63.847
|
43.25
|
Sept 14
|
48.25
|
47.75
|
21.75
|
21.25
|
63.881
|
43
|
Sept 16
|
48.5
|
47.75
|
22
|
21.25
|
63.504
|
43.25
|
Sept 20
|
48.25
|
47.75
|
22
|
21.5
|
61.478
|
43.25
|
Sept 21
|
48.0
|
47.5
|
22
|
21.5
|
61.394
|
43
|
Sept 22
|
47.75
|
47
|
21.75
|
21
|
61.38
|
42.75
|
Sept 26
|
47.63
|
47
|
22
|
21
|
60.955
|
42.25
|
Sept 27
|
48.75
|
48.25
|
22
|
21.63
|
61.001
|
42.88
|
Sept 28
|
49
|
48.5
|
22
|
21.25
|
61.082
|
43
|
Sept 30
|
50.75
|
50.25
|
23
|
22.63
|
61.131
|
44.75
|
Oct 05
|
50
|
50
|
23.75
|
23
|
62.038
|
46
|
Oct 10
|
49.13
|
48.88
|
22.88
|
22.25
|
63.44
|
44.5
|
Oct 17
|
50.25
|
49
|
23.5
|
22.25
|
64.392
|
44.88
|
Oct 20
|
50.13
|
49.5
|
23.5
|
22.75
|
64.798
|
45.13
|
Oct 24
|
50.5
|
50
|
23.38
|
23
|
65.315
|
45.5
|
Oct 25
|
51
|
50.5
|
23.5
|
23.25
|
65.527
|
46
|
Oct 26
|
50.5
|
50
|
23.5
|
22.5
|
65.398
|
45.5
|
Oct 31
|
50.5
|
49.75
|
23.38
|
22.75
|
64.922
|
45
|
Nov 09
|
46.75
|
46.25
|
20.5
|
20.5
|
64.877
|
41.25
|
Nov 18
|
47.88
|
47.25
|
21.5
|
21.5
|
65.242
|
42
|
Nov 21
|
47.5
|
46.88
|
21
|
21
|
65.331
|
41.75
|
Nov 25
|
46.5
|
46
|
20.75
|
20.75
|
65.259
|
41.13
|
Dec 02
|
49.13
|
48.5
|
22.88
|
22.88
|
64.705
|
43.5
|
Dec 07
|
49
|
48.38
|
22.28
|
21.75
|
65.126
|
44.23
|
Dec 08
|
48.78
|
48.25
|
21.88
|
21.38
|
65.199
|
44.38
|
Dec 13
|
49.5
|
49.13
|
23
|
22.13
|
65.267
|
44.5
|
Dec 19
|
46.98
|
46.38
|
22.75
|
22.38
|
65.441
|
44.5
|
Dec 22
|
49
|
48.25
|
22.75
|
22
|
66.269
|
44.63
|
Jan 04
|
46.38
|
45.88
|
22
|
21.63
|
66.663
|
43.63
|
Jan 05
|
46
|
45.38
|
22
|
21
|
66.709
|
42.38
|
Jan 07
|
45.75
|
45
|
21.5
|
20.5
|
66.916
|
41
|
Jan 09
|
45.25
|
44.5
|
20.5
|
20
|
66.916
|
40
|
Jan 10
|
41.25
|
39.5
|
19
|
17.5
|
66.992
|
36.88
|
Jan 11
|
40.38
|
38.25
|
19
|
17
|
66.997
|
34.63
|
Jan 13
|
44.63
|
43.38
|
20.75
|
19.5
|
67.095
|
|
Jan 16
|
45.5
|
44.13
|
21.37
|
19.75
|
67.193
|
|
Jan 18
|
45.63
|
44.25
|
20.5
|
19.5
|
67.164
|
|
Jan 19
|
44.88
|
43.63
|
20
|
19.25
|
67.009
|
|
Jan 20
|
44.38
|
43.38
|
20
|
19.5
|
67.04
|
|
Source: PARI Newspaper and reports of ING
Bank .
Behaviour of the Bulgarian Debt Price and
the Exchange Rate before Signing of the Deal with the London Club
Creditor Banks (January 1992 - June 1994)
The exchange rate in 1992
At the beginning of the period the exchange
rate was 23.281 BGL/1 US$. For most of 1992 the lev was showing a
slight increase. Its devaluation towards the end of the year was
insignificant, which is normal for the winter period. In that year
the foreign exchange reserves of the Bulgarian National Bank (BNB)
increased 4.5 times to reach US$ 1 442.8 mln. at the end of
October. The external financing from the IMF accounted for 57% of
this increase. BNB had the opportunity to intervene on the domestic
market more often, thus supporting the lev high levels. Its policy
was facilitated by the lack of sharp increases of forex demand and
when such increases were projected (i. e. towards the end of the
year), there were sufficient foreign exchange resources for stable
market interventions.
The exchange rate in 1993
The BNB policy of flattening out the
fluctuations of the exchange rate and gradually devaluating the
national currency achieved its goals in 1993. The lev slowly
devaluated by 7.13 lv. or 27.9%. In the first half of the year the
exchange rate showed almost constant levels. However, for the same
period consumer prices jumped by 34.6%, salaries - by 34.8% and the
monetary base - by 18.6%. The annual figures for these three
indicators are 53.9%, 58.9% and 53.1% respectively. The
substantially larger increase of these macroeconomic
determinants compared to the exchange rate suggests an
active and all-year-round support of the lev by BNB.
The exchange rate in 1994
It is only the forex speculations against
the lev, made by market makers on the exchange market, which could
account for the sharp fluctuations of the exchange rate that
occurred at the end of March and the end of August 1994. Only by
April the lev lost 98.3% of its value without any evident
macroeconomic reason. Consumer prices rose by just 16.6% and the
monetary supply - by 30.7%. So the highly increased demand for
foreign exchange was short-term and had a speculative nature. The
late intervention of BNB was another reason for the great
fluctuations of the exchange rate in 1994.
The foreign debt price levels fluctuated
around 16 cents per US$ 1 par value in 1992. They marked a stable
downward trend with no sudden falls. Nevertheless, the foreign debt
price reached its bottom for the studied period - 13 cents per US$
1 par. On the other hand, the exchange rate was increasing for the
better part of the year, except for the last quarter when the
dollar is typically strong. In 1993, the foreign debt price
switched from downward to upward trend, with the biggest jump at
the end of the year - 57.7%. At the same time the lev suffered from
its traditionally big winter devaluation - 16.7%. Only in the first
quarter of 1994, the soaring dollar was followed by a reduction of
the price of Bulgarian foreign debt. The devaluation of the lev by
98.5%, however, exceeds considerably the 14.6% drop of the foreign
debt price. The latest increase of 37.1% came along with much
weaker stabilization of the lev in the second quarter. A more
likely reason for the debt price jump was the refilling of the
foreign exchange reserve by the two IMF loans for total value of $
185.96 mln.
The hypothesis for a relation between the
fluctuations of the foreign debt price and the exchange rate is not
supported by the facts for the surveyed subperiod. Furthermore, the
trends of these two macroeconomic variables prove to be
opposite.
At the end of June, 1994 Bulgaria signed an
agreement with the London Club creditor banks for rescheduling and
reduction of its foreign debt. Three types of bonds were issued as
a result of the deal:
- Discount Bonds (DBs)
- Front Loaded Interest Reduction Bonds
(FLIRBs)
- Interest Arrears Bonds (IABs)
This changed the Bulgarian foreign debt
position on the international financial markets. It was replaced by
three different prices for the three types of debt securities. The
movement of the new positions is shown in the next
section.
Behaviour of the Bulgarian Debt Price and
the Exchange Rate after Signing of the Brady Deal (June 1994 -
January 1995)
The three new prices show almost identical
dynamics: they fluctuate respectively. Chart 2 shows two of the
price levels - the bid price of DBs and FLIRBs.
Chart 2.
BULGARIAN FOREIGN DEBT PRICE AND
EXCHANGE RATE
JULY 1994 - JANUARY
1995
The difference between them is almost
constant. Therefore, one could talk about a uniform dynamics of the
debt price, irrespective of the number of positions. October is a
record month for the Bulgarian foreign debt prices. At the
beginning of the month they reached their highest: 50.75 cents per
US$ 1 par for DBs, 23 cents per US$ 1 par for FLIRBs and 46 cents
per US$ 1 par for IABs.
At the same time the lev continued to drop
slowly. Its devaluation for the month was 5.6%. From the beginning
of that subperiod until the end of October, the devaluation of the
national currency compared to the US$ was by 20.9%. For the period
November 1994 - January 1995 the debt securities' price continued
to decline and reached its bottom on January 11, when the exchange
rate was stable, around 66 leva per US$ 1. By the end of the
period the rate reached slowly 67.04 leva per US$ 1. The
devaluation of the lev for the whole subperiod was by 24.9%, while
debt securities lost only 4% of their value. Although gradual, such
devaluation shows in a long-term perspective the aggravating
situation with the Bulgarian economy and the fact that GDP growth
lags behind the increase of the monetary base. In a short-term
perspective it is an indicator of a stable, although not drastic
overdemand for foreign exchange. The lack of any connection between
the exchange rate levels and the foreign debt price confirms the
supposition that the isolation of the domestic foreign exchange
market from the international ones hinders the way of the signals
incorporated in the exchange rate to the international debt market
agents.
The problem of having sufficient information
and of the interest of the market agent in such information is of
crucial importance when analysing the relation between the price
levels on a given foreign market and variables connected to
the national economy of a country like Bulgaria. The tables and
charts deny any connection between the foreign debt price and the
exchange rate level and prove that this macroeconomic variable is
not taken into account by the debt market agents.
Another indicator, which is not so closely
connected with the condition of the Bulgarian economy but because
of its nature is well known to the international agents is the
amount of the external financing of Bulgaria. Chart 3 shows
the relation between external financing and the foreign debt
price.
Chart 3
BULGARIA'S EXTERNAL FINANCING AND
FOREIGN DEBT PRICE
1993 - 1994
† The debt price after July 1994 is
the bid price of Bulgarian DBs.
The pick levels of the debt price are
solidly backed-up by the largest amounts of external financing,
above all on the part of IMF. The October jump indicates this most
clearly. The amount of the foreign support for September and
October reached US$ 312 mln. Thus, the improved solvency of
Bulgaria is a possible reason for the high levels of the foreign
debt price in that period. This is proven by the fact that the
actions of the institutions which extend these credits are closely
observed by the participants on the debt market.
The empirical data confirms the existence of
a cause-and-effect link between external and internal factors and
the prices of the Bulgarian foreign debt instruments. The steady
increase of the debt price after the principle agreement with the
creditor banks is continuing also after the technical conclusion of
the deal in July 1994.
The existence of a cause-and-effect link
between the debt price on the secondary markets and the
governmental changes in the debtor country was proven by the
development of the governmental crisis in the country in the middle
of November 1995. The drop in the prices of Bulgarian bonds in that
period came as a result of the announcement of the premature
parliamentary elections. The economic uncertainty before and after
the elections made the investment in Bulgarian securities quite
risky. Awaiting a new government which would commit to long-term
economic goals, the IMF and th |