A framework to reduce the burden of debt must: (a) allow debtors to grow faster and export more; and (b) enable the cost of debt service to fall.
Possible financial options include: (a) inflow of new capital through foreign direct investment; (b) conversion of foreign currency debt into domestic currency investment through debt equity swaps, thus altering the debtors' obligation and reducing their interest-bearing external debt; (c) conversion of existing loans into local currencies, thus repatriating flight capital and alleviating the drain on foreign currency resources; (d) using performance bonds or commodity-indexed bonds as a source of new money, although this would not significantly reduce debt overhang; (e) cushioning interest rate and currency shocks to debtor countries through financial engineering and liability management – for example, interest rate swaps and interest rate caps reduce interest rate sensitivity of existing liabilities by converting floating rate borrowings into fixed rate liabilities or by putting a ceiling on future interest rates; (f) new contractual arrangements between debtors and lenders, for example by subordinating existing debt to future loans, giving the latter senior status; (g) sharing the burden between debtors and creditors and providing debt relief by partial write-offs of existing loans; and (h) partial or complete interest capitalization as an alternative to accumulating new loans to finance interest due.