In a typical swap, a company buys a third-world loan from a bank at a deep discount. The company often must promise that profits will not be taken from the country for five to 10 years. Part of the third-world country's debt is wiped out, pleasing both the country and the bank. And the company gets an equity stake in the country. 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.