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The debt swappers. (capitalization programs in Third World countries )


Mexico's position looked hopeless. Ita talks with the IMF were breaking down. The Bank for International Settlements had just said that it couldn't help. The peso was plummetting -- in 10 days it had fallen by almost 50%. Even the Federal Reserve Board chairman had become sufficiently concerned to make an emergency dash to Mexico City to see the then finance minister, Jesus Silva Herzog. His mission: to head off an apparently imminent default by the Mexicans on their foreign debt.

Despite all this -- and Silva Herzog's departure a week after Volcker's mid-June visit -- the price of most Mexican debt on the secondary loan market was firm at around 60. There was no panic selling. A major reason for international bankers' confidence was that Mexico had finalized its long awaited plans for a capitalization programme to allow multinational corporations to swap foreign currency debt for peso equity capital, which they could use in Mexico. That meant Mexican debt -- which was for so long simply balance sheet ballast -- now had a use and a higher value.

Capitalization programmes are the height of financial fashion in the indebted third world.

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