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Swapping Debt for Nature
A financially significant deal announced by the Government of Ecuador and Credit Suisse (prior to its merger with UBS) in May 2023, has raised the prospect of debt-stressed countries writing down distressed debt on favourable terms in return for a commitment to allocate part of the “savings” for conservation or climate projects. This “debt-for-nature” swap is one in a recent series which, unlike in the past, has been structured and arranged by private players, with “blue or green” bond issues that raise the money to finance the buyback of expensive debt at heavily discounted prices. The combination of debt reduction, improved debt terms and locked-in conservation spending is presented as a “win-win” outcome for all concerned. But as critics have been quick to point out, there is much to be wary of in these complex transactions.
On the fringes of the opaque world of “innovative finance,” there is much excitement over recent efforts to swap the distressed foreign debt of less developed governments in return for a promise to protect biodiversity or “green the economy.” The excitement stems not the least from the fact that though debt-for-nature swaps had been experimented with as far back as the 1980s, only to lose momentum, there has been a sudden spate in such deals in recent times—Belize concluded a deal in 2021 (involving bonds valued originally at $553 billion); Barbados struck a deal to buy back a fraction, valued at $150 million, of its outstanding bond debt due to mature in 2029 and 2043; Ecuador completed in May 2023 what is, thus far, the biggest debt-for-nature swap (involving bonds with a face value of $1.6 billion); and Gabon, most recently, clinched a deal in August 2023 buying back $500 million worth of bond debt.
Though still a small share of total external debt, the magnitudes involved in Belize, Ecuador, and Gabon are much higher than the deals struck in the past, and large enough to attract interest as a joint solution to debt stress and past and future environmental damage. Moreover, while the earlier deals involved, besides the debtor sovereign, official bilateral creditors and philanthropic institutions and non-governmental organisations (NGOs), the recent deals are led by private players, who both structure the deal as well as finance it. Historically, given the fact that less developed countries were hard put to service hard currency debt and much of the debt up for restructuring was in or on the verge of default, private players had no interest. In those circumstances, the effort was aimed at getting creditor governments to write off some of the debt or get NGOs backed by philanthropies to buy up distressed debt at a discount and write it off, and to get the debtor to spend all or much of the “savings” garnered through these means on conservation projects in local currency. The debtor was offered some debt relief but, more importantly, relieved of the burden of finding or diverting scarce foreign exchange to service the debt.
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