debt for equity

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A system by which firms or countries with excessive debt exchange part of their debt obligations for equity, held initially by the former creditors. This may be beneficial for both debtors and creditors. The debtors gain from a reduction in gearing: when the profits of firms or export receipts of countries are low, less of them has to be spent on debt service. The creditors may also expect to gain, if the debtor's recovery prospects are uncertain. Holders of debt will lose if things go very badly for the debtors and they default, while if things go well the creditors do not share in the benefits. Holders of equity get little if things go badly, when the debtors might default anyway, but they do at least share in the benefits if things go well.

Subjects: Economics.

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