GETTING RID OF SOVEREIGN DEBT
You are a bank. You have a loan on your books to a sovereign borrower. The borrower is bust and is restructuring. You want to get rid of the loan. How can you do it? There are two ways. You can sell the loan at a discount, or--assuming the terms of the restructuring agreement allow for this-- you can convert it into equity in the country concerned. What are the problems?
There are three ways of selling a loan: assignment, participation, novation. The main problem with each is the extent to which you have to tell the borrower (he may not like his debt being traded at a discount) and whether the form of the sale lets you off the hook completely--in the case of any new money demands, for instance. From this point of view, novation is useless. It is certainly the cleanest method. It discharges the debt, releases the lender, creates a new debt on identical terms and substitutes the new lender. The trouble is that all the parties to the original agreement--borrower, agent and the other banks--have to be parties to the novation.
Assignment is easier.