The year 1987 could be called the year of "the big chill" for the banking industry in general and for big international banks in particular. It finally became obvious to bankers that most developing countries could not service their debts. Large banks in the United States and Europe, starting with Citicorp, began setting aside billions of dollars as security against losses due to decisions on the part of some large debtors to defer or even refuse to pay their obligations. International debt by developing countries reached the trillion dollar mark, of which some 64% was private. The average ratio of interest service to exports reached the 10% level; the average ratio of total debt service to GNP climbed from 3.9% in 1980 to 5.5% in 1986. The average ratio of debt volume to GNP jumped from 20.6% in 1980 to 35.4% in 1986.
Under these circumstances banks had to invent something new. Debt-equity swaps are designed to bail out both bankers and developing country debtors, as well as some cash-laden investors in developed countries. Table 12.3 explains debt-equity swaps in detail.
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