Debt-for-nature swaps, environmental problems and public debt

So here is an interesting concept in times of governmental debt crises and environmental problems: Debt-for-nature swaps (thanks for pointer to Professor Müller-Fürstenberger, Trier).

What is it?Debt-for-nature swaps involve the exchange of a debtor country’s external obligation for that country’s agreement to use local currency instruments to support a specific environmental project, such as development of conservation management plans, training of park personnel, or environmental education activities. These agreements are often described as deals where everyone benefits : the debtor country reduces its external debt, the environmental group can leverage its original donation amount, and banks profit from selling their debt on the secondary market or from the publicity value of donating the debt to the environmental group.” (source: WPS 393)

Is it a win-win situation? Hell yes! well, if cleverly done, yes. Take a country with both an environmental problem (e.g. deforestation, ecosystem destruction) and an unsustainable government debt, take an environmentally-concerned investor with too much money in his hands (Hello Mr Bill Gates, wink wink), get them sit together at the secondary debt market, and voilà:
Mean debt behold and be a goner!
My money is clearly stronger.
With this debt-to-nature swap,
I make your sorrows drop!

Does it work? Like always there are problems. E.g. deforestation in Brazil occurs to some extent illegally. If Mr Bill Gates does not prevent this additional deforestation even though he obtains the rights to a certain area of tropical rainforest due to the debt-for-nature swap, then nothing much is going to change. So there local institutions either need to be already in place or need to be put in place that also protect the endangered natural sites from illegal activities. Often, this is very difficult to control.

Check out a report on this by the World Bank on this HERE.

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