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DEBT-EQUITY SWAPS IN THE CONTEXT OF PRIVATIZATION: THE CASE OF BULGARIA

Sophia Kassidova

INTRODUCTION


 


Bulgaria is continuing transformation towards market-driven economy in a rather strained environment - huge foreign debt burden, sustained losses due to the Gulf War and the UN embargo against Serbia and Montenegro. The establishment of private property and market-oriented legislation, and the ongoing law reform aim at promoting private sector expansion and removing restrictions to foreign capital inflow.

In 1992 the National Assembly passed the Law on the Transformation and Privatization of State-Owned and Municipal Enterprises and the Law on Economic Activity of Foreign Persons and Protection of Foreign Investment. These acts present possibilities for privatization through foreign investment. In November an agreement in principle with the London Club creditor banks for restructuring BulgariaŠ²s external debt was reached, followed by further negotiations defining the size of the eligible foreign debt and the proportions among the instruments of the Brady-type menu. The agreement reached stipulates a provision for an exchange of some of the instruments of Bulgaria's external debt into equity. Nevertheless the fact that debt-equity swaps are not an option in the menu, the possibility for such transactions is provided by two of the instruments. This is an unique chance for speeding up privatization and attracting foreign capital together with foreign debt reduction. The finalization of the deal is a necessary condition for gaining back creditors faith which is an indispensable element for attracting inward foreign capital and the overall success of the reforms.

This following discussion is organized as follows: Part One presents a brief overview of the past few years of the reforms, the economic policies that have been followed and results achieved. This discussion serve to contextualize the economic environment in which DES schemes as an useful tool of the entire debt management will take place.

In Part Two is presented an exposition of the considerations regarding privatization through foreign investment. Attractive opportunities for inflow of foreign capital through debt-equity financing are provided by a profitable investment climate. Bulgarian economy is appealing to foreign capital inflow because of the advantages of its legislation, good economic basis and the subsidized price at which local enterprises will be acquired. On this basis the paper examines the conditions under which particular benefits will accrue to the foreign investor as a party in the transaction.

In Part Three is made an impact assessment of DESs on Bulgaria as a debtor country. In these descriptions the analysis focus on the short- and long-term negative and positive domestic and external aspects: pressure on monetary base, improvement in the current account and balance of payments, promotion of foreign direct investment (FDI), debt and debt service reduction as well as speed up of privatization. It is the central objective of this paper to describe and analyze the costs and benefits of applying DESs in Bulgaria as a debt troubled country and the impact of debt-equity financing on its economy.

The final part provides a summary of the arguments raised in the body of the paper.

 
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