Financial Innovations in International Debt Management : An Institutional Analysis

The international debt problem has already generated a huge number of publications. Why then another publication? Many publications address macroeconomic implications of the debt problem, others investigate special new financing instruments such as debt equity swaps, others discuss the economic or legal aspects of debt reschedulings. This work of Walter Berger concentrates on the evolution of the financial side of the debt problem. This evolution is fascinating since it reveals a continuous expansion of the financial instruments being used and a surprising change in intercreditor relationships. While in the seventies equal treatment of creditors was not of much concern, this changed dramatically in the eighties. But lately equal treatment turned out to be a strong impediment to the creditors' management of loan portfolios. Hence, inequality of treatment is growing again. This development represents a challenge to everyone who tries to explain legal changes by using economic theory. Another characteristic of Walter Berger's work is that he starts from a broad institutional perspective. Most economists analyze the debt problem by assuming a world where everybody follows the same principles of rationality and optimization. Walter Berger questions this approach by arguing that cultural discrepancies among creditor countries and indebted countries make it difficult to define efficiency by "Western" standards only. Moreover, different cultures create what Berger calls "institutional obfuscation", that is, creditors have substantial difficulties to predict the behavior of differently minded debtors, and vice versa. This lack of information creates a transaction risk for each contracting party.

1. Introduction.- 1.1. Subject and Purpose of Inquiry.- 1.2. Course of Inquiry.- 2. An Analytical Framework for an Efficiency Assessment of Innovations in International Debt Management.- 2.1. Terminological and Conceptual Prolegomena.- 2.1.1. Institutions and Financial Culture.- 2.1.2. Innovation.- 2.1.3. The Relationship Between Institutions and the Concept of Efficiency.- 2.2. Transaction Costs.- 2.2.1. Origin of the Transaction Cost Approach.- 2.2.2. Methodological Implications.- 2.2.3. A Taxonomy of Transaction Costs.- 2.3. Causes for the Emergence of Transaction Costs in International Debt Management.- 2.3.1. Obstacles for the Enforcement of International Loan Contracts.- 2.3.2. Examples of Enforcement Cost Inducing Behavior.- 2.3.2.1. Capital Flight.- 2.3.2.2. Corruption.- 2.3.2.3. Free Rider Behavior.- 2.3.2.4. Herding.- 2.4. Transaction Risks.- 2.4.1. A Taxonomy of Transaction Risks.- 2.4.2. Risk Management.- 2.5. Summary.- 3. The Evolution of Innovations in International Debt Management.- 3.1. The International Debt Crisis.- 3.1.1. Economic Background.- 3.1.2. The “Baker Plan”.- 3.1.3. The “Brady Plan”.- 3.1.4. Three Stages of Debt Crisis Management.- 3.1.5. The Menu Approach.- 3.2. Institutional Background of Innovations in International Debt Management.- 3.2.1. The Syndication Mechanism.- 3.2.2. Specifics of the Rescheduling Process.- 3.2.3. Important Contractual Provisions.- 3.2.3.1. Cross Default Clause.- 3.2.3.2. Pari Passu Clause.- 3.2.3.3. Negative Pledge Clause.- 3.2.3.4. Sharing Clause.- 3.2.3.5. Mandatory Prepayment Clause.- 3.2.3.6. Other Clauses.- 3.3. Recent Innovations.- 3.3.1. The Secondary Market for Rescheduling Country Debt.- 3.3.1.1. Participants.- 3.3.1.2. Transaction Modes.- 3.3.1.3. Legal Institutions.- 3.3.1.3.1. Novation.- 3.3.1.3.2. Assignment.- 3.3.1.3.3. Participation.- 3.3.1.4. Volume and Pricing.- 3.3.2. Debt Reduction Modes.- 3.3.2.1. Debt Equity Swaps.- 3.3.2.2. Debt for Debt Swaps.- 3.3.2.3. Debt Buy-Backs.- 3.3.2.4. Debt for Nature Swaps.- 3.3.2.5. Debt for Development Swaps.- 3.3.2.6. Debt for Commodity Swaps.- 4. Institutional Determinants of Innovations in International Debt Management.- 4.1. Sector-Specific Regulatory Determinants in the United States of America.- 4.1.1. Supervisory Determinants.- 4.1.1.1. Reporting Requirements.- 4.1.1.2. Capital Requirements.- 4.1.1.3. Lending Limits.- 4.1.1.4. Loan Classification Requirements.- 4.1.1.5. Reserve Requirements.- 4.1.1.6. Accounting for Fees.- 4.1.1.7. The Ninety-Day-Rule.- 4.1.1.8. Debt Equity Swap Regulation.- 4.1.2. Tax-related Determinants.- 4.1.2.1. Reserves.- 4.1.2.2. Debt Reduction Modes.- 4.1.2.3. Foreign Tax Credit Determination.- 4.1.2.4. Charitable Contributions.- 4.1.3. Accounting Determinants.- 4.1.3.1. Reserves.- 4.1.3.2. “Troubled Debt Restructurings”.- 4.1.3.3. Secondary Market Transactions.- 4.1.3.4. Debt Equity Swaps.- 4.1.3.5. Debt for Debt Swaps.- 4.1.3.6. Debt for Nature Swaps.- 4.2. Sector-Specific Regulatory Determinants in the Federal Republic of Germany.- 4.2.1. Supervisory Determinants.- 4.2.1.1. Reporting Requirements.- 4.2.1.2. Reserve Requirements.- 4.2.1.3. Capital Requirements.- 4.2.1.4. Lending Limits.- 4.2.1.5. Debt Equity Swap Regulation.- 4.2.2. Tax-related Determinants.- 4.2.3. Accounting Determinants.- 4.3. Comparison.- 4.4. Firm-Specific Determinants.- 4.4.1. Strategy and Organization.- 4.4.2. Financial Policy.- 4.5. International Political Determinants.- 4.5.1. Foreign Policy Considerations of Domicile Countries.- 4.5.2. Debtor Country Sovereignty Violation.- 5. Efficiency Analysis of Innovations in International Debt Management.- 5.1. Secondary Market Transactions.- 5.1.1. Reduction of Transaction Risks.- 5.1.2. Reduction of Transaction Costs.- 5.1.2.1. The Creditor Bank’s Perspective.- 5.1.2.2. The Rescheduling Country’s Perspective.- 5.1.3. Comparative Analysis of Debt Transfer Modes.- 5.1.4. Obstacles for Further Efficiency Gains.- 5.2. Debt Equity Swaps.- 5.2.1. The Creditor Bank’s Perspective.- 5.2.2. The Investor’s Perspective.- 5.2.3. The Rescheduling Country’s Perspective.- 5.2.4. Obstacles for Further Efficiency Gains.- 5.3. Other Debt Reduction Modes.- 5.3.1. Debt for Debt Swaps.- 5.3.2. Debt Buy-Backs.- 5.3.3. Debt for Nature and Debt for Development Swaps.- 5.3.4. Debt for Commodity Swaps.- 5.4. Summary.- 6. Conclusions.- References.