(FORTUNE Magazine) – LATIN AMERICA'S financial medicine men are experimenting with what many claim is a wonder drug to cure the region's debt problem. U.S., European, and Japanese lenders would swap loans to troubled countries like Mexico or Argentina for a stake in private companies in those countries. So far the medicine seems about as helpful as aspirin for a cancer patient. The few swaps that have been completed are just too small to do much more than dent the huge Latin debt. Still, debt-for-equity swaps can be good deals for the parties involved. Multinational companies can buy local outfits at big discounts, and lenders can clean up their balance sheets. Debtor countries win too. Swaps not only chip away debt, they amount to new investment. Swapping debt for equity is simple enough. A U.S. corporation or individual needs pesos to invest in Mexico. Instead of buying them directly from the Mexican government, the investor goes to a U.S. or European bank and buys Mexican loans, usually at a deep discount. Some Mexican loans go for as little as 55 cents on the dollar. The investor then sells the loans to Mexico's central bank for close to face value, receiving pesos instead of dollars. Banks led by Citicorp, Chase Manhattan, J.P. Morgan, and Bankers Trust, and investment banks including Salomon Brothers, Shearson Lehman Brothers, Drexel Burnham Lambert, and Bear Stearns are beating the bushes for business. The action is hottest in Chile, where the government is actively promoting swaps. The biggest single transaction so far is a swap by Bankers Trust involving $60 million of its Chilean loans. Bankers Trust used $40 million of the debt to buy a stake in two Chilean financial institutions -- 40% of AFP Provida, the largest pension fund management company in the country, with $350 million in assets, and 97% of Consorcio Nacional de Seguros de Vida, a life insurer with about $120 million in assets. The bank will use the rest of the Chilean pesos to acquire other companies. Even the Mormon church is getting into the act, using debt swaps to buy land for new churches in Chile. In Mexico, Citicorp handled a swap that will permit Nissan Motor to add $58 million in equity to its Mexican subsidiary. Citicorp Chairman John Reed has been poking around the Philippines looking into swaps of the bank's loans for a steel mill or a mining company. Morgan put together a $4-million swap in Mexico for Club Med. Chase Manhattan is thinking of swapping its own loans for a stake in a commercial bank in Argentina. Manufacturers Hanover is considering purchase of a mortgage bank in Chile. Even if debt-equity swaps are not a panacea, they will keep investment bankers happily employed for years. ''I'd be astonished if debt-equity swaps ever grew to 10% to 15% of total Latin American debt,'' says William Epstein, managing director of Bankers Trust's operations in Latin America and Asia. But Epstein's upper limit for swaps would produce a $40-billion to $60-billion market. For 1986 the market should total close to $2 billion, according to Jay Newman, a senior vice president at Shearson Lehman. U.S. bank regulations and accounting rules could put a damper on the party. If too much Latin debt is swapped below face value, accountants could require banks to write down their remaining Latin loans, a chilling thought for most lenders. The side effects could be painful for Latin countries too. By using local currency to buy back loans originally made in dollars, the countries pump up their money supply, which could send already high inflation soaring out of control. Chile each month auctions off the right to convert $60 million of loans, keeping a tight rein over the program to avoid excessive money creation. Both the U.S. Treasury and the International Monetary Fund are enthusiastic about debt-equity swaps. Proponents believe swaps can generate new confidence among Latin businessmen. The sight of foreigners buying up local companies could persuade the businessmen to invest at home rather than send their cash abroad. Such a change in attitude could alter the entire economic prognosis for Latin America.