How does a bank or entity "buy debt" ?what does this mean?
Especially how does a bank or entity "purchase a country's debt"?
For example the South Sea Compay purchased a good portion of Britain's debt in the early 1700's. How would this work?
Why would it wish to do so?
Answer:
rite, a simple explanation, debts r in the form of certificates, if a market exists for them, then they r trade-able, mostly known as bonds, y wud an entity buy them?
in most the cases, international debts lost their value, back in 1980, Latin American bonds had depreciated to less then half their face value because of the imminent danger of sovereign debt defaults (im sure u can re-call or heard about Brazilian and mexican threats to default, yes the defaults did not happen that time, but the mere threat was grave enough for the world to declare it debt crisis) now that the debt certificate is available at a cheap price, an international financial institution (IFI) can buy it, negotiate with the debtor which in our case wud be a country, relieve them of payments that r due or over due by re-scheduling and other available options, and when the country has more liquid capital available to invest in industry and infra-structure, will generate good growth, these IFI will get bak higher returns on a debt which was almost solvent at one time, n then wen the market has appreciated the debt certificate's value, sell it onwards to another entity, u wud be amazed to know that today over 70% of the international debt exists in the shape of trade-able bonds. the miracle of emerging markets would not have been possible without these!!
For example:
Someone owes you £1000 pounds but they won't pay you.
You sell that debt to a large gentleman for £500.
He goes to see that person and "persuades" them to pay him £750 in settlement of the debt.
Everybody s happy ish and the person who owed you the money keeps his kneecaps
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For example the South Sea Compay purchased a good portion of Britain's debt in the early 1700's. How would this work?
Why would it wish to do so?
Answer:
rite, a simple explanation, debts r in the form of certificates, if a market exists for them, then they r trade-able, mostly known as bonds, y wud an entity buy them?
in most the cases, international debts lost their value, back in 1980, Latin American bonds had depreciated to less then half their face value because of the imminent danger of sovereign debt defaults (im sure u can re-call or heard about Brazilian and mexican threats to default, yes the defaults did not happen that time, but the mere threat was grave enough for the world to declare it debt crisis) now that the debt certificate is available at a cheap price, an international financial institution (IFI) can buy it, negotiate with the debtor which in our case wud be a country, relieve them of payments that r due or over due by re-scheduling and other available options, and when the country has more liquid capital available to invest in industry and infra-structure, will generate good growth, these IFI will get bak higher returns on a debt which was almost solvent at one time, n then wen the market has appreciated the debt certificate's value, sell it onwards to another entity, u wud be amazed to know that today over 70% of the international debt exists in the shape of trade-able bonds. the miracle of emerging markets would not have been possible without these!!
For example:
Someone owes you £1000 pounds but they won't pay you.
You sell that debt to a large gentleman for £500.
He goes to see that person and "persuades" them to pay him £750 in settlement of the debt.
Everybody s happy ish and the person who owed you the money keeps his kneecaps
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