Conversion of Loans

Conversion of Loans

 

the substitution of new state loans for loans made earlier so that the terms of credit are extended and the rate of interest is changed, usually reduced.

In the capitalist countries conversions take place when there is an excess of loan capital. The purpose is to reduce budget expenditures for the state debt. Conversions do not touch the interests of large bond holders, who are often given monetary compensation and tax privileges. After World War I a loan conversion was carried out by the government of Great Britain in 1932; it changed a 5 percent war loan in the amount of £2.1 billion to a 3.5 percent loan. Large-scale loan conversions took place during the economic crisis of 1929–33 in Italy and France as well. Germany resorted to a loan conversion during its preparations for World War II.

In the USSR, loan conversions have been used to raise the purchasing power of Soviet money and to mobilize additional capital for financing the national economy. They are carried out under conditions that make it possible to protect personal savings lent to the state. The loan conversion in 1936 was carried out concurrently with issuance of the State Domestic Loan for the Second Five-year Plan (fourth-year issue). Bonds for state loans floated by public subscription at earlier times were replaced by bonds for this loan. As a result of the conversion the term of the loans was lengthened from ten to 20 years and the interest rate was reduced to 4 percent.

In 1947, after the monetary reform, a loan conversion was carried out because much of the state debt had formed during the war years, when the purchasing power of money had dropped. The monetary reform meant that this debt would have to be repaid in full-value rubles. The bonds for the 11 loans being converted were replaced by bonds for the new state 2 percent loan of 1948, which was issued for 20 years using a ratio of three rubles in bonds for loans issued earlier to one ruble in bonds of the new loan (under the monetary reform, old money was exchanged for new at a ratio of 10:1). At the same time the freely circulating state domestic lottery loan of 1938 was converted. Bonds for this loan were replaced by bonds of the new freely circulating state 3 percent domestic lottery loan. This was done at the times established for exchanging cash; the ratio was five rubles in 1938 state loan bonds to one ruble in bonds of the state 3 percent loan.

K. S. KARTASHOVA

References in periodicals archive ?
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The conversion of loans into equity and outstanding interest will rid the corporation of the heavy interest burden and liability to repay the loan.
The conversion of loans into equity and interest outstanding thereon will rid the Corporation of the heavy interest burden and liability to repay the loan.