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Long term prospects in Eastern Europe : the role of external finance in an era of change (English)

Private investors have an important role to play in the ongoing process of reform in Eastern Europe. So external creditworthiness is crucial to a successful transition. Large government borrowing crowds out the formation of private contracts between international investors and domestic entrepreneurs and firms. Given the overall credit ceiling in international lending, the public sector needs to curtail its external borrowing to leave room for the private sector. This also implies that public debt reduction may be especially desirable in the highly indebted countries of Eastern Europe. Rather than flood the public sector with new loans, international organizations should attempt to improve domestic creditworthiness by supporting debt reduction and borrowing restraints during the transition period. Debt for equity swaps represent an attractive vehicle for debt reduction in the highly indebted countries of Eastern Europe. Such schemes, when tied to the privatization effort, are not inflationary. They simply represent a swap of public liabilities, and they create value to the extent that foreign private investment leads to positive externalities. The challenge will be to create swap mechanisms that will allow the Eastern European countries to retain a large share of those gains.

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Citation

Diwan, Ishac Saldanha, Fernando

Long term prospects in Eastern Europe : the role of external finance in an era of change (English). Policy, Research, and External Affairs working papers ; no. WPS 695. Debt and international finance Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/779921468771620579/Long-term-prospects-in-Eastern-Europe-the-role-of-external-finance-in-an-era-of-change