Debt-Equity Swaps

Posted on March 29, 2015 by Martin Armstrong

Debt-equity swaps were used in the former Soviet satellites in Eastern Europe. This was the chief method of making the transition from communism to capitalism. Poland implemented an extensive privatization program back in 1990 and had privatized half of all state-owned enterprises by the end of 1994. Indeed, debt-equity swaps were introduced into the Polish process in 1994, primarily for use by Polish banks in converting their non-performing loans into equity stakes in the debtor companies. Nevertheless, foreign debt was not eligible for use in these Polish debt-equity swaps, although there were suggestions in 1995 and 1996 that external foreign debt should be.

Other Eastern European countries, such as Croatia, the Czech Republic, and Hungary, have used debt-equity swaps to enable banks to exchange debt for equity in highly indebted local companies so that the local banks become shareholders in the companies. Bulgaria  has likewise made extensive use of debt-equity  conversions, primarily of external debt in the form of Brady bonds.

The debt-equity swap that we are proposing would be open to both domestic and foreign holders of debt through a series of tranches being swapped into coupons that could then be used to invest in domestic private shares, not the privatization of inefficient state run entities.

The coupons would then be free to trade on the open market. Foreign investors could sell them at current market prices to whomever wanted to invest domestically in shares. The central bank would then return to its original design free from being compelled to buy exclusively government bonds. Stimulation would be direct rather than indirect whereby they would buy corporate paper during times of recession that would soften the hard-landing and reduce swings in unemployment. Currently, relying on the banks to lend defeats the purpose of stimulation for they lack the confidence to lend and will stockpile cash during economic declines.

There are more layers to this proposal than meet the eye at first glance. It would be a step in reclaiming the free markets and bringing a final end to the Marxist era of state manipulation.

Breakdown of Debt

Posted on March 30, 2015 by Martin Armstrong

QUESTION: 

Mr. Armstrong, I have been eagerly awaiting your Solution and am trying to wrap my head around it. Can you explain more about the debt to equity swaps? What exactly would the debt be swapped for? PS: In your latest blog, you mentioned repealing the “13th” amendment. That gave me quite a shock until I realized you meant the “16th”!!

RF

ANSWER: Well yes I meant the 16th, but ironically we are all economic slaves from their view anyway so it would abolish our slavery as well under the 13th.

A debt-equity swap is what you do to make a transition. In the case of Mexico, it was a swap of debt types. In Eastern Europe, it was a swap for state owned assets. Poland implemented an extensive privatization program in 1990 and had privatized half of all state-owned enterprises by the end of 1994.Debt-equity swaps were introduced into the Polish process in 1994, primarily for use by Polish banks in converting their non-performing loans into equity stakes in the debtor companies. Foreign debt was not eligible for use in these Polish debt-equity swaps.

In this case, we would swap out the federal debt of $18 trillion into coupons that are redeemable for the purchase of private equity. You would then take the coupons and invest in stock. Since large corps are buying back their shares now, they do not need the money. This will go to entrepreneurship starting up businesses or expanding small business. It would provide a stake in the nation for all for the lower class would actually become investors. The “rich” make money from investment, not wages.

Of course there will be people who criticize this idea. They have no practical solution for there is no other choice. You reach the point of no return. Governments are causing DEFLATION and destroying everything as they hunt money. That will collapse the world economy and they are TOO STUPID to comprehend what they are doing until it is too late. The hard money guys have already sent nasty emails, but their world is precisely what Germany is imposing in Europe. They are handing the people over to the bankers for go ahead, back bonds with gold and how do you pay your mortgage.

There is no practical solution and EVERY debt crisis has involved either a DEFAULT or some sort of haircut. Any way we slice it, the next downturn will present solutions that hand more money to the bankers and you will see revolution next time. We either seriously look at how to end this cycle of perpetual borrowing, or go build a cabin in the woods far from everything. We are rapidly reaching the point of no return.

The city of Mainz was where the Gutenberg Press was invented. That created a economic boom like the internet today. The politicians spend wildly assuming taxes would never end. So they borrowed heavily against expected future revenue. As taxes rose, people left town. Their debt kept rolling as new issues were sold to pay off the last one. When nobody showed up for the next issue, they could not pay. They collapsed and eventually the creditors sacked the city and burned it to the ground. I sup[pose that is a solution.