US Treasury Secretary James Baker III and British Chancellor of the Exchequer Nigel Lawson, among others, have endorsed these swaps. Economists generally concur, but with a few reservations. William Cline of the Institute for International Economics in Washington points out that, besides inflationary overtones, rampant swapping can also substitute for what might be more beneficial direct foreign investment. In any case, the country pays something, either in taxes, inflation, or lost investment opportunity. But as long as the swaps are kept under control, a little inflation may be preferable to a groaning debt, notes Brian Hannon of the Office of South America of the United States International Trade Administration.
Banks take the biggest losses, selling loans at a discount.
But at least they get something for loans that otherwise might never have been collected. Mexico, too, has embraced the concept. Last year, Nissan bought Mexican government debt in the secondary market in New York for 57.5 cents on the dollar. The Mexican Ministry of Finance then bought this obligation from Nissan for 88 cents on the dollar in pesos. Nissan will use the money to increase its capital base through new investment, warehouses, and other facilities.