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Debt Swap: The Concept
Below is outlined very broadly the concept of debt swap.
Specifics are omitted. While many variables affect the value of a
loan, we herein only look at the fact that an asset's value may
change over time. A "devaluation" of the original principal
amount of a loan in real terms opens the door for negotiating a
debt swap. We also point out a fundamental distinction between a
debt equity swap and a debt-for-nature swap. This distinction is
essential in understanding debt-for-nature swaps.
A debt swap hinges on two fundamental considerations:
I) the value of a loan may vary over time depending on a
plethora of exogenous variables and
II) a loan is a legal contract between lender and borrower: both
have rights and obligations under a loan agreement. It is
clear, however, that the borrower has an obligation to repay
to the lender the face amount of the loan under the original
terms unless both parties agree to an alternative method to
satisfy the obligation.
Example
1)
Lender extends US$ 100.00 loan to borrower.
2)
Borrower gives lender I.O.U. which states that borrower owes
lender US$ 100.00 at a specified time in the future in
accordance with certain agreed upon terms and conditions.
3) The value of that original loan is US$ 100.00 on date loan
made.
Concepts
A)
The value of a loan is a function of its collectibility. At
the time a loan is made, the lender expects to receive US$
100.00 back. Therefore, the value of that asset on
disbursement day (day 1) is US$ 100.00
B) If the lender determines, for whatever reason, that the
borrower is unable to repay the full amount of the original
loan, then the real value of the asset falls, since the loan
is perceived to be less than fully collectible under the
original terms and conditions. The resulting discount on the
loan is the difference between the original expectation of
collectibility (US$ 100.00) on day 1 and the current
expectation of less than full collectibility. This
"devaluation" occurs because of a deterioration of a
borrower's financial condition, its inability to access
foreign exchange, etc..
C)
Regardless of the creditor's perception of collectibility on
the loan, the borrower still contractually owes the lender
US$ 100.00.
D)
The lender, recognizing the borrower's inability to repay
US$ 100.00, may indicate to the borrower that he is willing
to accept something other than US$ 100.00 from the borrower.
A swap, therefore, is the acceptance by the lender of an
asset other than the original US$ 100.00 (for example, local
currency).
E)
Specifically, if the loan in our example is trading at a 50%
discount, the chances of collecting the full US$ 100.00 are
only one in two. Given this expectation, the original holder
of the loan decides to sell it for US$ 50.00. (Better to get
at least US$ 50.00 now than potentially receive even less in
the future.) Once the loan is sold for US$ 50.00 to a third
party, a transfer of title occurs. The new holder of the
debt note exchanges the US$ 100.00 note which it purchased
for US$ 50.00 for local currency. The local currency
received from the Central Bank for the note exceeds the
amount of local currency that US$ 50.00 would have otherwise
purchased at the Central Bank foreign exchange window if the
debt swap did not occur. This multiplier effect is one
important reason why debt swap is attractive.
Debt Swap: Debt-Equity vs. Debt-for-Nature
Conceptually, a debt-equity swap is very similar to a debt-
for-nature swap: in both cases, a dollar obligation is
cancelled with local currency. The fundamental difference
between the swaps stems from the control and disposition of
funds once a swap has been executed. In a debt equity swap,
a creditor bank becomes a partial or whole owner in a local
business concern. There is an actual transfer of ownership
from local to foreign control. Because of this, the charge
is sometimes made that the local government has "sold out"
to foreign interests.
The point is that a debt equity swap must be distinquished
from a debt-for-nature swap since A debt-for-nature nature swap
does not result in a transfer of land ownership nor is
such a transfer even contemplated. Any land set aside for
conservation purposes in a debt-for-nature transaction remains
under the direct control of the debtor country. In short, a debt-
for-nature swap is a specific means by which a country, through a
local organization, either public or private, can protect its
ecosystem and natural resources in a manner consistent with
sustainable development while reducing its debt burden and
maintaining direct control of the land.
4
The
Nature
Conservancy
FACTS
1815 North Lynn Street
Arlington, Virginia 22209
U.S. DEBT-FOR-NATURE SWAPS TO DATE
(As of March 31, 1990)
DATE
COUNTRY
PURCHASER
COST
FACE VALUE
*CONSERVATION
OF DEBT
BONDS GENERATED
3/90
Costa Rica
Sweden/WWF/TNC
$1,998,000
$10,800,000
XAL $9,720,000
3/90
Dominican Republic
PRCT
$116,400
$582,000
$582,000
8/89
Zambia
WWF
$454,000
$2,270,000
$2,270,000
7/89
Madagascar
WWF/AID
$950,000
$2,100,000
$2,100,000
4/89
Ecuador
WWF/TNC/MBG
$1,068,750
$9,000,000
$9,000,000
8x
1/89
Costa Rica
TNC
$784,000
$5,600,000
$1,680,000
1/89
Philippines
LUF
$200,000
$390,000
$390,000
2/88
Costa Rica
NPF
$891,000
$5,400,000
$4,050,000
12/87
Ecuador
WF
$354,000
$1,000,000
$1,000,000
8/87
Bolivia
CI
$100,000
$650,000
$250,000
6,916,150
37,792,000 31,042,000
TNC z The Nature Conservancy
= NOTE: Does not include
WF N World wildlife Fund
interest earned over
PRCT = Puerto Rican Conservation Trust
life of the bonds.
MBG = Missouri Botanical Garden
NPF = National Parks Foundation of Costa Rica
CI = Conservation International
AID = U.S. Agency for International Development
1) Average burchase prace = 18.83%
2) Average = 82.14%
Po
in
AMEXA
attphen
DEBT-FOR-NATURE SWAPS:
clude eco-
DEBT RELIEF AND
ronmental
BIOSPHERE PRESERVATION?
C and mili-
can Magi-
ad of pro-
Stephen VanR. Winthrop
wenty-first
Crushing debt obligations and a rapidly deteriorating natural environ-
ment are two of the most serious problems confronting many less devel-
oped nations (LDCs) today. An innovative attempt to "kill two birds with
one stone" - to alleviate both of these problems simultaneously emerged
in 1987 in the form of the "debt-for-nature swap." This technique is in-
tended to relieve the relentless pressure on LDC central banks to drain
precious foreign exchange by reducing part of the debt obligation (the
commercial banks absorb some losses), and allowing debt payments in
local currency instead of U.S. dollars. It also seeks to provide local con-
servation organizations with vital funds for the purchase of lands to be
converted into national parks and for the establishment of endowments
for research, maintenance, and protection of the parks.
The Debt Problem
The magnitude and complexity of the global debt problem preclude
a monolithic solution and have forced the international financial com-
munity to scramble for innovative ideas. In Peru some debt was retired
by a lending bank in a barter exchange for iron ore and coffee.¹ Another
more broadly applicable solution is the "debt-equity swap." While actually
1. See Latin American Weekly Report, No. 87-88 (November 1, 1987), 7.
Stephen VanR. Winthrop is a management consultant at Strategic Planning
Associates, an international consulting firm. He graduated from the SAIS/Whar-
ton MBA/MA program in 1988.
129
SAIS Review
summer/Fall 1989
130 SAIS REVIEW
a somewhat misleading term when also used to describe exchanges of
debt for cash, bonds, and even other debt, the debt-equity swap evolved
out of one of the principal laws of economics: "markets work." In es-
sence, swaps allow a foreign investor to purchase local currency at a dis-
count, which in turn is used to acquire equity in a local business.
Most banks have been highly secretive about the swap programs in
which they have engaged. All banks and other businesses deal with "bad
debt" in two stages. First they estimate how much of the debt on their
books will not be collected, establishing a loan loss reserve. At some later
date, the institutions will then decide to write off particular pieces of
uncollectable debt (this happens when the debt is sold at a discount or
deemed uncollectible). Prior to 1986, Generally Accepted Accounting
Procedures (GAAP) required that all similar loans (that is, other loans
to the same country) be readjusted to market value after one piece of
debt was used in a debt swap or sale. This is significant because banks
might be forced to write off too much debt, too quickly. Even after ac-
counting standards were changed, allowing other debt to stay in the bank's
books at differing levels of discount, banks remained secretive about the
swaps because they feared their bargaining power with other debtors
would be undermined if the specifics of the swaps were known.2 Esti-
mates are that the debt swap market is small but growing: about $1 bil-
lion (face value) in 1984, $3 billion in 1985, and $6-7 billion in 1986;
although no data are available for 1987, it appears as if this trend may
be decelerating.3
Debt-equity swaps were engineered to perform the same function
as a debt restructuring in a corporate bankruptcy proceeding: to reduce
the burden of future debt payments by distributing some of the company's
equity to its creditors. Some bankers intoned that Latin American coun-
tries had acquired too much debt in the 1970s and not enough direct
investment, and that debt-equity swaps corrected that imbalance.
Whether or not this argument is valid, it must be stressed that debt-equity
swaps, like corporate restructurings, are not purely debt relief, but rather
(at least in part) debt conversion. All obligations are not being removed;
instead, some are merely being given a new identity. A flow of interest
payments is being replaced by an anticipated flow of (repatriatable) divi-
dend payments. This key point resurrects the ugly specter of neocolonial-
ism: foreign-owned companies (so dependency theory states) drain the
resource-rich, capital-poor LDC and ensure the perpetuation of a cycle
2. See Financial Accounting Standards Board, Accounting Standards (New York: McGraw
Hill, 1986), 11589, 11825.
3. Richard Weinert, "Swapping Third World Debt," Foreign Policy, no. 65 (Winter 1986):
85-97.
DEBT-FOR-NATURE SWAPS 131
changes of
of dependency. This helps explain some of the local resistance to debt-
ap evolved
equity swap programs and is discussed in more detail below.
rk." In es-
cy at a dis-
Environmental Degradation
siness.
ograms in
Just as world debt has exploded, the world's environmental prob-
with "bad
lems have increased both in number and in severity. Some observers, like
t on their
Conservation International's Peter Seligmann, have suggested that the
some later
two problems are interrelated: "The global environmental crisis has been
pieces of
accelerated by tremendous economic pressures on the developing world
scount or
service its debt. Quick-fix economic solutions, which frequently de-
:counting
stroy to the natural resource base, are often the response to these debt obli-
her loans
gations." Whether or not this connection can be empirically established,
piece of
the severity of the environmental crisis can not be denied. Intervention
use banks
by man in the form of air, soil, water, noise, and atmospheric pollution,
after ac-
exhaustion of natural resources through deforestation, overhunting and
he bank's
overfishing, inefficient farming, overpopulation, and other factors are
about the
permanently and irreversibly destroying the natural environment. The
debtors
results of this wanton destruction include desertification, soil erosion,
n.2 Esti-
alkalinization, ozone depletion, watershed loss, salinization, and the ex-
It $1 bil-
tinction of flora and fauna faster than species can be catalogued - a rate
in 1986;
of extinction "unparalleled even by the extinction of the Pleistocene era."
end may
These problems are of epidemic proportions in the tropical regions of
the world, which harbor an estimated 60 percent of the world's species
function
on only 6 percent of its land surface.⁵
) reduce
A growing body of research literature is successfully debunking the
mpany's
notion that human progress and environmental preservation are locked
n coun-
in mortal combat. In Natural Resources and Economic Development in
h direct
Central America, H. Jeffrey Leonard persuasively argues that improved
alance.
efficiencies in land clearing and land use (using existing knowledge and
t-equity
technologies) could dramatically reduce the exploding demand for
t rather
productive land in the region by increasing the productivity of existing
moved;
land.6 Leonard and others have complained that international develop-
interest
ment assistance agencies (including the U.S. Agency for International
e) divi-
Development and the World Bank) are at least condoning, and perhaps
olonial-
even encouraging, the myopically destructive policies of many LDCs.
ain the
4. See Fernando Cardoso and Enzo Faletto, "Nationalism and Populism: Social and Politi-
a cycle
cal Forces of Development in the Phase of Consolidating the Domestic Market," in Peter F. Klaren
and Thomas J. Bossert, eds., Promise of Development: Theories of Change in Latin America,
(Boulder, Colo.: Westview Press, 1986). 149-65.
McGraw
5. Statement by Peter Seligmann, Executive Director of Conservation International, delivered
at the Embassy of Bolivia July 13, 1987), 1. Provided to the author by Conservation International.
: 1986):
6. H. Jeffrey Leonard, Natural Resources and Economic Development in Central America:
A Regional Economic Profile (New Brunswick, N.J.: Transaction Books, 1987), 170.
132 SAIS REVIEW
term economic implications." Yet the destructive policies of the World
throughout Central America," Leonard warns us, "have important long.
"The rapid physical changes and environmental deterioration occurring
that "sustainable development" must replace "slash-and-burn" as the
Bank and others continue unabated. Pilot programs are already proving
World. guiding principle behind economic development throughout the Third
The Debt-for-Nature Swap
The idea of applying the financial wizardry of debt-equity swaps
to the problems of environmental degradation has generally been credited
to Thomas E. Lovejoy, formally with the World Wildlife Fund and now
at the Smithsonian Institution.⁸ The mechanics of the debt-for-nature
swap, as it has come to be known, closely mirror those of a conventional
debt-equity swap: an international environmental group (sometimes re-
ferred to as an NGO, or non-governmental organization) either buys or
is given by the lender a block of deeply discounted Third World debt.
This dollar-denominated debt is then taken to the central bank of that
country and converted into either local currency or a local-currency
denominated bond. The local funds are used either to purchase private-
or government-owned lands and convert them into national parks, or
to fund environmentally beneficial activities. These activities might in-
clude maintaining parks, paying for park rangers or game wardens,
educating local populations on proper farming techniques or the dangers
of degradation, establishing waste-treatment facilities, and many other
possibilities. These activities themselves are nothing new; what the debt-
for-nature swap adds is a magnification effect- "more bang for the buck."
The following example illustrates the key features of a debt-for-
nature swap. Three variables are important to understand: (1) the dis-
count rate (the difference between "par" and "market" value); (2) the
"exchange rate" (how many dollars it takes to buy one unit of local cur-
rency); and (3) the maximum amount of local currency usually made
available for the swap by the local government. The magnitude of the
discount rate, how much of the discount is to be shared with the local
government when the swap into local currency is made, and the valua-
tion of the local currency can all contribute to the "magnification ef-
fect" in a debt-for-nature swap. Table 1 lists some of the prices being
quoted on the secondary market for Latin American debt.
7. Ibid., 113, XX.
8. See Jeff B. Copeland et al., "Buying Debt, Saving Nature," in Newsweek (August 31,
1987), 597.
1987), 45, and John Walsh, "Bolivia Swaps Debt for Conservation," in Science, 237 (August 7,
DEBT-FOR-NATURE SWAPS
133
occurring
Table 1. Comparative Data on Selected Latin American Countries*
long-
the
World
Secondary
Population
dy proving
Market
Density12
m"
as
the
GNP'
Loan Prices¹⁰
Area"
(per persons
the
Third
($US billions)
(US cents/dollar)
(sq miles)
sq mile)
Country
3.9
12.00
424,162
15
Bolivia
Brazil
270.1
39.00
3,288,042
44
14.9
60.50
286,396
43
uity
Chile
swaps
Colombia
31.3
58.00
439,518
68
n
credited
Costa Rica
3.8
14.00
19,695
137
and
now
10.7
15.00
106,000
91
or-nature
Ecuador
El Salvador
3.8
NA
13,176
376
ventional
Honduras
3.4
22.00
46,600
99
etimes
re-
121.4
41.00
760,373
107
buys
Mexico
or
Paraguay
3.6
NA
157,047
26
debt.
24.5
6.00
482,258
42
of
that
Peru
5.9
60.00
72,172
42
currency
Uruguay
Venezuela
47.9
39.00
352,143
51
private-
parks,
or
GNP and population estimates are for 1986; secondary market debt data are offer prices as
might
in-
of January 1989. Data may vary from those discussed in the text due to fluctuations in prices
wardens,
in the secondary market for debt.
dangers
ny
other
the
debt-
The first example of a debt-for-nature swap was unveiled in July
buck."
1987, and involved the exchange of $650,000 in Bolivian debt held by
lebt-for-
a Swiss bank for a three-part promise by Bolivian President Paz Estens-
the
dis-
soro: (1) an existing national park would be enlarged more than ten-
(2)
the
fold; (2) the park would get more permanent and credible legal protec-
cur-
tion; and (3) an endowment fund of $250,000 in local currency would
made
be established to protect and maintain the park. 13 Conservation Inter-
of
the
national, an organization formed in January 1987 by a dissident group
he
local
from The Nature Conservancy International, engineered the Bolivian
valua-
9. World Bank, World Debt Tables, (Washington, D.C.: The World Bank, 1987-88 Edi-
ef-
tion), II.
being
10. Merrill Lynch & Co. secondary market for debt quoted in American Banker, January
16, 1989, 2.
11. Goode's World Atlas, (New York: Rand McNally & Co., 1953), 162.
12. Mid-1986 population estimates are from the Population Reference Bureau, Inc. (Washing-
ugust
31,
ton, D.C., April 1986).
August
13. All of the information on the Bolivian swap came from Peter Seligmann and Charles
7,
Steele of Conservation International in Washington, D.C. I extend to them my deepest thanks.
134 SAIS REVIEW
deal. The Beni Biological Reserve consists of a 3.7 million acre "buffer
zone" encircling a pre-existing 334,000-acre park. The 6,740 square miles
feature a landscape of diverse forest formations, open savannah grass-
lands, and an exceptionally rich diversity of flora and fauna; [the Re-
serve] supports 13 of Bolivia's 18 endangered animal species, including
primates, spotted cats, deer (including the endangered marsh deer), wild
boar, river otter, foxes, anteaters and bats, as well as birds, amphibians
and reptiles.
The area is also the home of the Chimane Indians, a nomadic tribe
that lives by hunting and fishing. The 3.7 million acre buffer zone, al-
though not a fully protected area, "will be managed for 'sustainable de-
velopment'
While there [will] be economic activity with the reserves,
some sections [will] be completely protected for wildlife, for hunting by
Indians, or for other purposes. Finally, the local currency equivalent
of $250,000 (40 percent funded by the Bolivian government, 60 percent
by U.S. AID) was earmarked for a trust fund whose income will be used
for management and preservation of the reserve.
The creation of the Beni Biological Reserve in Bolivia was a nearly
ideal opportunity for the first debt-for-nature swap. Bolivian debt has
been discounted by as much as 90 percent on the secondary market (Con-
servation International's benefactors purchased the $650,000 in debt for
$100,000); Bolivian President Paz Estenssoro and his administration en-
thusiastically supported the plan; and the pressures by developers in north-
ern Bolivia are comparatively much less strong than in most of the rest
of Latin America (Table 1 also shows that Bolivia has the lowest popula-
tion density in the region). The exchange was a simple transaction, as
the Bolivian government already owned the land, and the $650,000 ob-
ligation was simply discarded in exchange for the three-pronged agree-
ment by Bolivian authorities.
Several slightly more complex debt-for-nature plans have followed
Conservation International's Bolivian swap. Two projects in particular
involve a $10 million swap in Ecuador (a partnership between the World
Wildlife Fund and the Fundacion Natura, a local group in Ecuador),
and a $5.4 million deal in Costa Rica-both quoted in the face value,
not market value of the debt. Peru, Brazil, Paraguay, and Colombia have
also considered debt-for-nature plans. However, since these deals involve
significantly larger conversions into local currency, Latin American
governments have been unwilling to convert directly into local cash be-
cause of inflationary concerns. Instead, medium-term (three- to ten-year
14. Philip Shabecoff, "Bolivia to Protect Lands in Swap for Lower Debt," in The New York
Times, July 14, 1987, C-1.
DEBT-FOR-NATURE SWAPS 135
re "buffer
maturity) local-currency bonds, backed by the local government, have
lare miles
been issued and swapped for the dollar-denominated debt.
ah grass-
The Costa Rican plan has involved a constellation of NGOs, led by
[the Re-
The Nature Conservancy, Conservation International, the World Wildlife
including
Fund, and Costa Rica's Fundacion Neotropica. 15 The $5.4 million, con-
eer), wild
verted into a colon-denominated, five-year, nine-month bond, has been
phibians
earmarked for several activities throughout Costa Rica, about half going
to the purchase of privately owned land in the Guanacaste region of south-
dic tribe
western Costa Rica and converting it into and maintaining it as a na-
zone, al-
tional park. 16 The Costa Rican plan is the life project and brainchild
able de-
of Dr. Daniel H. Jansen, a biologist and professor at the University of
reserves,
Pennsylvania. Largely because of the high population density in Costa
nting by
Rica (137 inhabitants per square mile, compared to only 15 in Bolivia),
uivalent
pressures of timber poaching are extreme. The percentage of Costa Rica
percent
covered by forest and woodland shrank from 51 percent in 1970 to 31-36
be used
percent in 1980; the estimated 15,000 square kilometers remaining are
disappearing at a rate of 600 per year. 17 In addition to developmental
1 nearly
pressures, the Costa Rican government is requiring that the benefit of
ebt has
the debt's deep discount be shared: roughly a 30 to 70 percent split be-
it (Con-
tween the government and the NGOs respectively. 18 Transaction fees are
lebt for
also higher than in the Bolivian case because bank and trustee fees are
ion en-
being levied by the government-owned bank against the bond-generated
north-
income. Finally, the Costa Rican swap program differs from Conserva-
he rest
tion International's Bolivian swap in that its emphasis is upon funding
opula-
ongoing support services such as park rangers and education campaigns
ion, as
rather than establishing the national parks themselves.
00 ob-
agree-
lowed
icular
15. The other groups involved are the Association Ecologica La Pacifica, Pew Charitable
Fund, The MacArthur Foundation, The J. Noyes Foundation, The Swedish Society for the Con-
World
servation of Nature, the W. Alton Jones Foundation, and the Organization for Tropical Studies.
ador),
The funds will go to: Parque Nacional Braulio Carrillo, Proyecto Parque Nacional Guanacaste,
value,
Centro Ecologica La Pacifica, Liga do Conservacion do Monteverde, Biosphere Reserve La
have
Amistad, Parque Nacional La Amistad, Organization for Tropical Studies, and the Project for
Development of Protected Areas of the National Parks Foundation. Source: February 9, 1988
volve
Press Release by the Costa Rican National Parks Foundation (a private sector conservation group)
rican
and the Costa Rican Ministry of Natural Resources, Energy and Mines.
h be-
16. All of my information on the Costa Rica plan came from The Nature Conservancy In-
ternational, and great thanks are extended to Randall Curtis and Alan Randall at TNC.
-year
17. Leonard, "Natural Resources and Economic Development in Central America: A Region-
al Economic Profile," 117-25.
18. The government will convert only 75 percent of the face value into locally denominated
instruments, and Costa Rican debt is selling at 20 percent of face value on the secondary mar-
York
ket. Therefore the Costa Rican government gets 25/80ths (31.25 percent) of the benefit of the
discount, and the rest (55/80ths, or 68.75 percent) goes to the NGOs.
136 SAIS REVIEW
Obstacles to Success
Although debt-for-nature swaps are similar to debt-equity swaps in
is]
implications, local political reactions, implementation schemes, and even
many ways, significant differences exist: key players, tax and regulatory
the underlying goals tend to vary. No comprehensive study has yet
Ir
peared that looks at the full range of issues confronting debt-for-nature ap-
ai
swaps and evaluates their overall effectiveness. In the broader context
market, and at what prices?
of all debt swaps, will more or less debt be available on the secondary
B
Vt
Throw the Bums Out
is
is
After the initial euphoria surrounding debt-equity swaps receded,
political leaders in some debtor countries at first expressed caution and
later concern. Whether it is called xenophobia or nationalism, protec-
n
tionism or industrial policy, shortsightedness or warranted concern about
a
neocolonialism, over the last fifty years LDC leaders have consistently con-
in
strained foreign ownership of the means of production, particularly when
natural resources were involved. The debt-equity swap has resurrected
n
this old issue, and it is no coincidence that its champion in Latin Ameri-
S
ca is the standard bearer of open-market economics: Chile. Yet Chile
is also under near-dictatorial rule. Eduardo Amadeo, economic adviser
to Argentina's Peronist party, contends that aggressive debt conversion
is possible in countries only where "ballot boxes are filled with votes be-
fore the election. In other words, he fears that those most likely to
benefit from swap programs are wealthy foreigners and a few of the most
wealthy local investors.
Although a debt-for-nature swap, almost by definition, does not call
for foreign ownership of local assets (in this case, land), nationalism is
still a relevant issue. As one observer put it, "How would you [the United
States] like it if the Japanese used your trade deficit to buy the Grand
Canyon?" Clearly, the analogy is flawed in several respects: Debt-for-
nature swaps do not lead to foreign ownership of national parks (con-
trol, maybe ). Furthermore, the swaps are typically prompted by lo-
cal officials and/or foreign NGOs, not by blackmailing creditors. A more
accurate analogy might be, "How would you like the Japanese to recycle
part of the their trade surplus as a Sierra Club-run project to reclaim
land ruined by strip mining?"20
nal, December 9, 1987, 34.
19. As reported by Peter Truell, "Chile Pushes Debt-Conversion Program," Wall Street Jour-
Third World," in The Los Angeles Times (December 9, 1987), Part II, 7.
20. See Patti Petesch and Sheldon Annis, " 'Debt-for-Development' Plan Is No Gift for
DEBT-FOR-NATURE SWAPS 137
Nevertheless, a valid aspect of this argument pertains to paternal-
ism: "Who are these foreigners to think they know better than we do
in
how to manage natural resources?" In the Bolivian swap, nothing was
gulatory
stopping the Bolivian government from buying back the debt themselves.
nd
even
In fact, its later commitment of $100,000 in local currency to support
yet
ap-
and administer the Beni Reserve matched the $100,000 cost of the debt;
-nature
all it stood to gain was the preservation of foreign exchange reserves. Af-
context
ter providing Conservation International with the full $100,000 for the
condary
Bolivian swap, the beneficence of the Frank Weeden Foundation inter-
vened, making everybody feel they came out ahead. Unfortunately, the
issue of paternalism remains. The American NGOs are sensitive to this
issue and insist upon entering the deals in partnership with local environ-
mental groups and government leaders. Conservation International's char-
ceded,
ter declares that its "board, staff, and membership [are] composed of
and
nationals of the countries in which it works,"2¹ and other groups such
protec-
as The Nature Conservancy also emphasize the importance of working
about
in concert with local groups and individuals.
con-
Even if local people are consulted, their latent resentment of pater-
when
nalism may persist as long as their perceived utility of national parks is
rected
less than the parks' utility to philanthropists and NGOs from the United
Ameri-
States. Any resentment is probably more than offset by puzzled amuse-
Chile
ment over how millions of U.S. dollars are being spent on nature reserves
dviser
outside of the United States, while simultaneously debt is declining and
valuable foreign exchange is being preserved. If the government can share
be-
in the spoils of cashing in the debt at a steep discount, so much the bet-
to
ter. Although paternalism may not be an important issue now, any dis-
most
parity in perceived utilities may sow the seeds of future discontent. Edu-
cation campaigns are one obvious way to narrow the gap in perceived
call
costs and benefits.
is
Lost or Empty Promises
-for-
A sensitive but necessary question that must be raised about a debt-
for-nature swap is whether the host country will honor and enforce its
lo-
end of the agreement. This problem can emerge in many different forms.
nore
For example, what is stopping future administrations from reneging on
an agreement to preserve a virgin rain forest? The Reagan administra-
tion demonstrated how a determined interior secretary could punch
enough holes in the regulatory framework to allow wanton oil explora-
tion and extraction in U.S. parklands. Given the frequent changes of
governments throughout most of Latin America, the chances of one leader
for
21. From a promotional brochure for Conservation International.
138 SAIS REVIEW
overriding his predecessor's policies are significant. The NGOs are cog-
stip
nizant of this problem, and a key element of Conservation Internation-
tion
al's Bolivian swap was to strengthen the language under which the Beni
ate
Reserve is protected. In 1982 the old reserve was declared a natural, pro-
stra
tected area by administrative decree- a positive move, but one that gave
Int
it only a tenuous and nonpermanent status. Under the agreement signed
not
in 1987, President Paz Estenssoro agreed to "encourage" the Bolivian
tec
Congress to grant both the Beni Reserve and the vast buffer zone sur-
rounding it Congressional Law Status, the highest legal protection status
the
in Bolivia.
sid
A far more damning criticism of the Bolivian plan is that it may
cill
have created a "paper park," or a region properly delineated on maps
suc
but not monitored, maintained, or protected by the government. This
the
has been a common problem with parks established in LDCs, but Con-
Th
servation International was the first to address it head-on. As part of
Bc
the Bolivian agreement, a "trust fund" was established whose income is
m:
specifically targeted for administrative, managerial, and protective ac-
Al
tivities. This $250,000 fund was endowed by the U.S. AID and the
to
Bolivian government with the local currency equivalent of $150,000 and
of
$100,000, respectively.
so
However, establishing this fund has not completely solved the "pa-
U
per park" problem. In fact, this has persisted as the most common criti-
h
cism of the Bolivian swap. One must first ask whether $250,000 is suffi-
ti
cient to manage properly, on an ongoing basis, an area larger than the
ly
states of Connecticut and Rhode Island combined whose inaccessibility-
TO
with one seminavigable river and a handful of washed-out dirt roads-
si
helps explain why the area has remained untouched up until now. Ac-
cording to Bolivian environmental activist Javier Lopez, Bolivia already
has 26 refuges and parks that exist only on paper and do little to protect
wildlife. 23 Even Conservation International's own president, Spencer Bee-
be, has acknowledged that the estimated $5 million being spent per year
in all of Latin America is probably only 1-2 percent of what is really
needed to establish a "reasonable land conservation infrastructure." In
the case of the Beni plan, research has clearly been given a higher pri-
ority than protection; according to a Conservation International official,
the income from the $250,000 fund is more likely to go to zoological and
botanical research than to park patrols or maintenance. 24 Furthermore,
the reporting arrangements of the Bolivian government to Conservation
International are vague and nonbinding, although the agreement
22. Interview with Charles N. Steele, Conservation International, February 9, 1988.
23. See Copeland, "Buying Debt, Saving Nature," 45.
24. Interview with Charles N. Steele, Conservation International, February 9, 1988.
DEBT-FOR-NATURE SWAPS 139
are cog-
stipulates that Conservation International "will name a national institu-
ernation-
tion as executing entity of its program and/or projects" which will initi-
the Beni
ate all funding requests.25 In effect, enforcement and protection are ab-
ural, pro-
stract budgetary items inadequately provided for in the Conservation
that gave
International-Bolivian agreement. Although illegal encroachment may
nt signed
not be much of a problem now, how will the Bolivian government pro-
Bolivian
tect the Beni Reserve when development pressures increase?
zone sur-
Perhaps the Beni's best protector will be not the government, but
on status
the drug traffickers who already control much of the Bolivian country-
side. The importance of the Bolivian drug trade raises the broader an-
it it may
cillary question of whether national parks facilitate prohibited activities
on maps
such as gun running, illegal mining, timber or wildlife poaching, in
nt. This
the Bolivian case- the harvesting, processing, and exportation of cocaine.
out Con-
The Beni region is one of the principal cocaine refining regions in Bolivia.
S part of
Both its geographic proximity to Colombia and its difficult accessibility
icome is
make the region particularly attractive to the country's narcotraficantes.
ctive ac-
Although some of the trafficking of refined cocaine is now being diverted
and the
to the east, through to Brazil instead of to the north, a substantial level
000 and
of narcotics activity is likely to remain in the Beni region. This begs the
somewhat embarrassing question of whether charitable funds in the
:he "pa-
United States, as well-intentioned as they may be, might be indirectly
on criti-
helping Bolivia's drug trade by reducing commercial pressure (poten-
is suffi-
tially competitive with the cocaine industry) in the Beni region. Certain-
han the
ly narcotics activity on public lands is nothing new; a 1981 "60 Minutes"
bility-
report documented how Californian parklands were being used exten-
roads-
sively by marijuana growers.
)W. Ac-
A final problem that could dilute the beneficial impact of a debt-
already
for-nature swap pertains to the hoard of bankers and government offi-
protect
cials involved in the complex transactions of the exchange. Remember
er Bee-
that the wedge of the discount on the debt is what makes these agree-
er year
ments so attractive. Without the discount, it becomes a simple one-to-
really
one cash transaction. However, an exchange involving discounted debt
re." In
requires an investment banker to find the debt, facilitate the transaction,
er pri-
and charge a fee. The local government will most likely want a share
fficial,
of the discounted wedge. In the Costa Rican case, 75 percent of the debt's
al and
face value was offered, leaving 25 percent to the government. If a bond
more,
or trust fund is established, local bankers will receive a management fee.
vation
Costa Rican officials have refused to allow competitive bidding for the
ement
management of the $5.4 million Natural Resources Conservation Fund,
25. See Articles 5 and 6, "Agreement Between the Government of Bolivia and conservation
988.
International," July 13, 1987 (document provided by Conservation International).
26. "Sinsemilla: The Report on Seedless Marijuana Grown in Northern California," aired
188.
on "60 Minutes" (Columbia Broadcasting Company, Inc.), January 11, 1981.
140 SAIS REVIEW
insisting instead that the Costa Rican Cooperative Bank ("Bancoop") be
the trustee and administrator of the project, and receive an annual fee
of 2 percent of the fund's principal. 27 Finally, there is always the risk
of extortion, corruption, or some type of misallocation of funds. Taken
together, these real or potential problems can chip away at the original
intent of the exchange: to exploit the magnification effect of discounted
debt in the interest of protecting fragile natural ecosystems.
Where's the Debt?
With $1.02 trillion in total external debt worldwide in 1986, $399
billion of it owed by the nations of Latin America and the Caribbean, 28
an ample supply of debt clearly exists. Furthermore experts agree that
the debt's chances of being collected are becoming increasingly remote.
One estimate suggests that the weighted average of all outstanding Third
World debt dropped from 66.9 cents on the dollar in December 1986
to 45.3 cents a year later. 29 Most observers foresee no reason for this de-
cline to abate, and none predict a miraculous reversal in this trend; in
fact, even the slightest recession in the United States would exacerbate
the problem. Although Brazil recently ended its second moratorium on
debt interest payments, it is depending heavily upon new loans to help
service its debt and to shore up foreign exchange reserves. Argentina al-
most declared its own debt moratorium in early 1988, saved only by an
eleventh-hour agreement engineered by the International Monetary Fund
involving further austerity measures and $1 billion in new debt.
Given this glut of increasingly discounted debt, why then has it been
so difficult for NGOs to purchase modest nuggets of highly discounted
debt on the secondary market? Interviews with both Conservation Inter-
national and The Nature Conservancy revealed that finding the debt,
not raising the funds, was their single greatest obstacle. 30 Furthermore
locating banks willing to make charitable contributions was seen as be-
ing even more difficult than purchasing the debt on the secondary market.
In order to determine why the NGOs are having difficulty finding
debt for conversion, the reasons why purchases of debt from the general
secondary market have not been more common must be explored. There
27. See "Costa Rican Debt for Nature Agreement," translated and provided to the author
by The Nature Conservancy International, January 1988; also, internal memo at The Nature
Conservancy International by Alan Randall, November 20, 1987.
28. The World Bank, World Debt Tables (Vol I), 2, 18.
29. Shearson Lehman Brothers, Inc., as reported by Andrew Alber, "Mexico Debt Prices
Fall in Secondary Market," Institutional Investor, December 1987.
30. Interviews with Charles N. Steele, Conservation International, December 21, 1987, and
with Randall Curtis, The Nature Conservancy International, January 12, 1988.
DEBT-FOR-NATURE SWAPS 141
coop") be
two explanations for why the number of traditional debt-equity swaps
annual
fee
are has slowed down. First, local governments have been restrictive about
the
risk
which types of equity in local businesses should be made available to for-
Taken
eign investors (local banks are normally either government- or locally-
original
owned in the Third World, and foreign ownership is barred). Most U.S.
liscounted
banks are far more interested in staying in the banking business than
in getting into the hotel or shrimp farming business, for example. How-
ever, exceptions do exist. In Chile, Bankers Trust owns a power station,
and Citicorp owns a gold mine and a fishing fleet.31 More often than
not, central banks have been the greatest constraint on debt-equity swaps,
986,
$399
rejecting plans for political reasons. Often these banks restrict open-
ribbean,
28
market purchases or sales of the debt or securities. Second, even if a cen-
that
tral bank and a U.S. commercial bank can agree on swapping into a
remote.
local shrimp farming venture, more and more frequently the commer-
Third
cial bank is now backing out of the deal because its advisers feel that
1986
the best local investment opportunities have already been claimed, and
this
de-
this shrimp farming project may not be profitable enough. Therefore,
trend;
in
in spite of the steep discounts available, swapping debt for local equity
xacerbate
that is both available and potentially profitable is no longer a simple
orium
on
to
help
proposition. As useful as these observations may be for the debt-equity market,
entina
al-
they offer little insight into why NGOs have had difficulty finding debt
by
an
for debt-for-nature swaps. Three theories have surfaced in attempts to
Fund
explain this dearth of discounted debt for environmental NGOs. The first
pertains to U.S. ,tax and accounting policies. It has already been noted
as
it
been
that prior to 1986, highly secretive U.S. banks were uneasy about trad-
iscounted
ing debt for fear that they would have to write down all similar debt to
Inter-
the market value of the traded debt. After the Securities and Exchange
the
debt,
Commission and the Financial Accounting Standards Board removed the
thermore
regulatory ambiguities, banks still feared that their bargaining position
as
be-
on the other debt would be compromised. Meanwhile several organiza-
market.
tions encouraged the Internal Revenue Service to liberalize the tax treat-
finding
ment of charitable contributions of debt instruments. In addition, in
general
November 1987 the U.S. Treasury Department issued Revenue Ruling
There
87-124, stating that banks could deduct the full face value, not just the
market value, if the debt was contributed to a conservation organization."
the
author
The
Nature
31. Truell, "Chile Pushes Debt Conversion Program," 34.
32. Originally communicated in a June 25, 1987 Private Letter Ruling signed by U.S. Treasury
Secretary James Baker, Revenue Ruling 87-124 was issued on November 12, 1987. Source: Ran-
Debt
Prices
dall Curtis, The Nature Conservancy International. There are still some technical differences
in the tax treatment of contributed debt (a charitable contribution) and debt sold on the secon-
1987,
and
dary market (a business loss). For more, see Jud Harwood, "Nature Swaps," in Taxes Interna-
tional, London, England (Issue 93-unpublished proof), 10.
142 SAIS REVIEW
The first such charitable gift was $254,358 from Fleet/Norstar Finan-
loc
cial Group (a regional bank based in Providence, Rhode Island) to the
it
Costa Rican project in early February 1988. 33 However, some analysts
usu
speculate that banks may have already written down their debts to near
ex
market value, thereby rendering the new Treasury Department ruling
irrelevant and ineffective. In any case, if banks ever were reluctant to
fur
sell debt on the secondary market for tax reasons, such barriers have at
tio
least been reduced.
wh
The two most significant problems confronting NGOs are that Third
th
World debt is normally held in large parcels and by bank consortia. The
W
magnitude of the loans-typically in the tens or hundreds of millions of
ar
dollars-places them out of reach of NGOs. Only in extreme cases like
do
Peru, whose debt is selling at about six cents on the dollar, might a large
block of debt (perhaps $50-100 million) be within reach. More typical-
pc
ly, however, NGOs are looking to purchase debt with a market value of
ca
between $100,000 and $500,000; such smaller parcels are harder to find.
in
Debt parcels of this size are more thinly traded, typically held by lesser
ia
known regional banks, more likely to have been fully written down remov-
su
ing potential tax benefits, and transactionally are not worth the time of
ta
the large investment banks to track down.
by
Since most Third World debt is not held by a single bank but rather
N
by a consortium of banks, potential buyers need the approval of not one
as
but several banks to execute a single exchange, and the logistics of such
b
a transaction are exponentially more complex as compared with debts
involving only one bank. Banks are not just secretive and conservative,
a:
explains one author, "the world's big banks had painstakingly forged
ir
cooperative links on the debt issue that served all of their interests. For
W
one bank to break ranks and try to dump its debt would have threatened
0
those links and shaken international banking and capital markets. Com-
P
bine this fact with the notion that banks have more experience collect-
a
ing on bad loans to farmers in Nebraska than on those to Latin Ameri-
a
can countries, and the resulting caution and conservatism far outweigh
y
any tax or public relations benefits gained from a debt-for-nature swap.
h
Financial Erosion
A final area of concern with debt-for-nature swaps pertains to the
longer-term economic policies of the host government. In particular, two
S
problems predominate: inflation and overvalued currencies. An overvalued
33. John Kostrzewa, "Fleet Debt Deal Preserves Jungle Habitat," in The Providence Journal-
2
Bulletin, February 9, 1988. See also Jud Harwood.
34. Interview with Charles N. Steele, Conservation International, February 9, 1988.
35. Weinert, "Swapping Third World Debt," 87.
DEBT-FOR-NATURE SWAPS 143
tar Finan-
local currency makes an initial switch into local currency more costly than
nd) to the
it would be at a free market exchange rate, and local inflation, which
e analysts
usually outpaces the U.S. rate during the life of a project, makes the
ots to near
exchange rate at which dividends are paid back in dollars unattractive.
ent ruling
In both the Bolivian and Costa Rican swaps, local "endowment
luctant to
funds" were established to fund ongoing maintenance, research, educa-
rs have at
tion, or protection activities associated with national parks. The reason
why these funds were established at all, rather than simply converting
hat Third
the U.S. dollars into local cash all at once, has been articulated by the
ortia. The
World Bank: "Long-term financial instruments in the domestic market
hillions of
are needed to ensure that the conversion into domestic monetary assets
cases like
does not increase monetary growth above established targets. This "in-
ht a large
creased monetary growth" has a simpler name: inflation. From the view-
e typical-
point of the local government, a sudden rush of cash into the economy
: value of
caused by a debt-for-cash swap has the same inflationary effect as turn-
T to find.
ing on the printing presses. Granted, an infusion of $250,000 in the Boliv-
by lesser
ian case, or even $5.4 million in the Costa Rican case, into the money
T remov-
supply is probably trivial and could easily be neutralized through mone-
e time of
tary "sterilization," where the central bank reduces the money supply
by the same amount by selling government bonds on the open market.
ut rather
Nevertheless, inflationary concerns will become increasingly significant
f not one
as the swaps become larger, calling for bonds or endowment funds to
S of such
be used instead.
th debts
Inflation rates in the Third World, and particularly in Latin America,
ervative,
are typically much higher than those in the United States. As a result,
y forged
interest rates are also higher: In Costa Rica they are about 27.5 percent
ests. For
while those in the United States are less than 10 percent. 37 In the case
reatened
of either the debt instruments or the endowment funds, the interest rate
"35 Com-
paid at any point in time is pegged to the current rate of inflation, and
collect-
as inflation goes up or down, so do the interest rates. In the Costa Rican
Ameri-
agreement, one analyst has observed that the interest expense in the first
utweigh
year of the colon-denominated endowment fund is more than twice as
re swap.
high as it would have been for the old dollar-denominated debt.
Over time, if local inflation is persistently higher than U.S. infla-
tion and exchange rates are allowed to adjust, the local currency will
depreciate. This may lead to some concern that a locally denominated
S to the
endowment fund created in a debt-for-nature swap will lose value under
lar, two
such conditions. However, this is not necessarily the case. In both the Costa
rvalued
36. The World Bank, World Development Report (Washington, D.C.: World Bank, 1987),
Journal-
22.
37. Inflation rates of 27.5 percent in Costa Rica and 5 percent in the United States were
1988.
used in an analysis done by The Nature Conservancy. For continuity's sake, I am using the same
figures in my analysis.
144 SAIS REVIEW
Rican and Bolivian cases, no funds will ever be converted back into dol-
lars. Therefore, as long as the interest rate is pegged to the inflation rate,
and
it really does not matter what inflation is or how much the exchange
wou
rate changes. Although prices may go through the roof, the yield of the
colo
bond or fund will keep pace with inflation, and if exchange rates float,
the real cost of both domestic and foreign goods will remain constant.
ind
The prognosis is somewhat different if the local government does
stri]
not allow the exchange rate to float freely. An overvalued currency can
reje
dilute the magnification effect at the time the swap occurs. As the World
an
Bank warns, "debtor countries must ensure that transactions take place
colo
at an undistorted exchange rate, otherwise the discounts on the debt may
ue)
be outweighed by exchange rate considerations. In Venezuela, for ex-
anc
ample, debt-equity swaps have stalled because "businessmen are unwill-
tac
ing to 'lose' 40 to 50 percent of their investments when the official rate
int
is Bs14.50 to the dollar and the free market rate is fluctuating at be-
infl
tween Bs33 and Bs35 to the dollar. Costa Rica's limit of converting
only up to 75 percent of the debt's $5.4 million face value into local cur-
of
ize
rency has the same effect as artificially dropping the exchange rate from
70 colones/dollar (the free market rate) to 52.5 colones/dollar.
len
in
Even if the exchange rate is fair at the time of the swap, it is always
to
possible that the local government may in the future attempt to suppress
the
inflationary pressures by not allowing the currency to devaluate. Interest-
do
ingly, such an overvalued currency can only help an American looking
lar
to convert back into dollars- or even just wanting to buy an American-
made product locally (for example, a Jeep for use in the national parks).
qu
a
Evidence of an active black market, such as the one in Venezuela, can
Ri
therefore portend potential financial erosion if the exchange into local
th
currency has not yet occurred-but it can also be either irrelevant or
th
even good news once the swap has been conducted.
th
The above analysis shows that, except for the danger of an over-
valued local currency at the time of the swap, neither inflation nor rigged
pr
at
exchange rates are important factors when a local currency endowment
is,
fund is established through a debt-for-nature swap. Therefore, both of
in
these problems are only marginally important for the Costa Rican and
th
Bolivian plans described here. However, inflation and overvalued ex-
er
change rates would be important factors if currency exchanges were spread
out over time. In order to enhance the impact of an original dollar-
P
the
denominated endowment, The Nature Conservancy has contemplated
b
two alternative plans. Plan A would have half of the bond's principal
payments converted back from colones into a dollar-denominated fund,
38. The World Bank, World Development Report (1987), 22.
tt
39. Latin American Weekly Report, October 1, 1987, 4.
P
DEBT-FOR-NATURE SWAPS 145
into
dol.
and the second half would keep the entire bond dollar-denominated but
rate,
would convert the interest and principal payments as they came due into
exchange
colones.4
of
the
Plan B has been viewed as a way to take advantage of an inflation-
float,
induced deterioration of the exchange rate in Costa Rica consistently out-
constant.
stripping inflation in the United States. The Costa Rican government
does
rejected it immediately, and not surprisingly. In its purest form, such
rrency
can
an exchange would represent classic arbitrage: by going from dollars into
the
World
colones and back into dollars again, you could buy $1 million (par val-
take
place
ue) of debt today for $200,000, switch into colones, back into dollars,
debt
may
and walk away with $750,000 tomorrow. Nevertheless, if strings were at-
for
ex-
tached to the dollar repayments such that they would have to come back
are
unwill-
into Costa Rica at a later date, this could be an effective hedge against
fficial
rate
inflation.
at
be-
Finally, another approach resembles a conventional rescheduling
converting
of debt more than it does a debt-equity swap, where no discount is real-
local
cur-
ized on the secondary market. Instead, the term of the debt is simply
rate
from
lengthened (say, from five to eight years), and payments can be made
in colones instead of dollars. At the core of this scheme is an attempt
is
always
to take advantage of excessive inflation in Costa Rica, and the bigger
suppress
the spread between local and U.S. inflation, the better off would be the
Interest-
dollar-denominated fund. The logic behind this is straightforward. A
looking
large inflation spread means that the purchasing power of each subse-
American-
quent interest principal payment has grown. Table 2 is a summary of
parks).
a detailed sensitivity analysis of the cash flows of a $5.4 million Costa
zuela,
can
Rican bond from the viewpoint of an American NGO. It assumes that
into
local
the yield on the bond is pegged to the Costa Rican rate of inflation, and
elevant
or
that there is a perfectly floating exchange rate between the colon and
the dollar. If the rates of inflation in both countries are 5 percent, the
an
over-
present value of the flow of interest and principal payments (discounted
rigged
at 5 percent) is almost exactly equal to the face value of the bond-that
dowment
is, the net present value (NPV) is close to zero.⁴¹ But as the interest rate
both
of
in Costa Rica increases, so does the NPV of the swap to the NGO. Every-
Rican
and
thing else held constant, higher inflation abroad is as good news as low-
ex-
er inflation at home. Using the current estimated inflation rate of 27.5
spread
percent, the internal rate of return for this case is 7.13 percent. Since
dollar-
the inflation rate in the United States is only 5 percent, this proves to
emplated
be a good "investment" for the NGO.
principal
fund,
40. These alternative plans were discussed in two interviews with Randall Curtis at The Na-
ture Conservancy International: November 24, 1987, and February 22, 1988.
41. The Net Present Value calculation at i=5% does not equal zero exactly due to sim-
plifying assumptions on bond coupon payments.
146 SAIS REVIEW
Table 2. Inflation Sensitivity Analysis, Costa Rica Debt-for-Nature
Bond"
de
or
U.S. Inflation Rate =
Costa Rican
Net Present
th
Inflation Rate
Inflation Rate
Value
as
of
5.0%
5.0%
US$ 16,801
in
10.0
56,852
th
15.0
109,773
to
20.0
169,581
of
25.0
232,794
27.5
265,004
n:
30.0
297,379
ai
35.0
362,157
b
40.0
426,451
rt
ti
When the Costa Rican government put a $5.4 million limit on the
current debt-for-nature program, the NGOs persuaded the government
n
not to include donated debt in this figure. Therefore the $250,000 from
Fleet Bank is being considered separately. If the NGOs are successful in
e
getting more donated debt, they hope to create a dollar-denominated
lo
"Superfund" of up to $50 million capable of allocating $400,000 annu-
I
ally for each of Costa Rica's seven major parks.43 Should they succeed
in creating the Superfund, this analysis suggests that the NGOs will ben-
efit if Costa Rican inflation exceeds U.S. inflation, but will suffer should
a
the colon be overvalued in subsequent exchanges into local currency.
a
Conclusions
]
Debt-for-nature swaps have been heralded by editorial pages as
I
"bonds for biology" and as "a way to preserve endangered environments
like the Amazon rain forest
[and]
ease
the
foreign
debt
burden
blocking Third World development."⁴ The successes achieved in Bolivia,
I
Costa Rica, and Ecuador now serve as concrete evidence that the idea
works. Hundreds of thousands of acres of tropical forest are now being
protected, with varying degrees of effectiveness, from lumber crews and
reckless slash-and-burn expansion.
42. This analysis borrows heavily from a similar study performed by Peter L. Howell, vice
president of Shearson Lehman Brothers, for The Nature Conservancy International (November
4, 1987). See Appendix for a fuller explanation of the spreadsheet analysis.
43. Interview with Randall Curtis, The Nature Conservancy International, February 22, 1988.
44. "Buy Bonds, Save Rain Forests," editorial in The New York Times, September 5, 1987.
DEBT-FOR-NATURE SWAPS 147
Nature
However, it is dangerously misleading to suggest at this time that
debt-for-nature swaps are going to have a significant or lasting impact
on the world debt crisis, the dizzying destruction of natural habitats, or
resent
the rate of extinction of hundreds of biological species. One estimate that
lue
as much as 10 percent of Costa Rica's total debt burden, and 15 percent
of Bolivia's, could be relieved through this mechanism is absurd and noth-
16,801
ing short of irresponsible. Not even the billions of dollars exchanged
56,852
through debt-equity swaps are affecting as much as one percent of the
09,773
total debt burden, and debt-for-nature swaps are only a fraction the size
69,581
of their larger relative.
32,794
The four principal constraints on debt-for-nature swaps-dormant
65,004
nationalist resistance, unfulfilled promises, the limited availability of debt,
97,379
and the twin problems of inflation and overvalued currencies-can all
62,157
be overcome. Yet, these constraints are significant enough to force a major
26,451
reevaluation of priorities. Even if successful on a small scale and concep-
tually elegant, debt-for-nature swaps are so logistically, politically, and
the
economically problematic that they have the effect of trying to move a
mountain with a teaspoon.
from
Faster and larger-scale solutions to the twin problems of debt and
in
environmental degradation must be pursued, and the natural place to
inated
look is the public sector. The multilateral development agencies and the
annu-
U.S. government could address such issues with billions of dollars at a
acceed
time, not thousands or millions. Prior to the end of 1987, however, the
ben-
U.S. government's involvement in resolving the debt issue consisted of
should
a stubborn insistence that this is a problem to be settled between the banks
and their debtors. This hands-off approach was reflected in former Treas-
ury Secretary (now Secretary of State) James Baker's toothless preaching
about free enterprise and anti-inflationary austerity measures in Seoul,
Korea in what has come to be known as "The Baker Initiative. As
as
numerous analysts have suggested for some time, "the most promising
approach to easing the [debt] crisis involves a partial assumption of the
urden
debt of public-sector entities in exchange for substantial interest-rate
olivia,
relief."47
idea
In December 1987 the U.S. Treasury finally acknowledged the merits
being
of intervention and unveiled a refinancing plan for a portion of Mexico's
and
roughly $100 billion in external debt. However, the $10 billion in bonds
45. Ibid.
46. See Riordan Roett, "Beyond the Baker Initiative," in The SAIS Review, vol. 6, no. 2
vice
(Fall 1986): 27-37.
ovember
47. Weinert, "Swapping Third World Debt," 95.
48. The Treasury Department and Secretary Baker did, however, continue to insist that
1988.
they played only a passive role in structuring the deal-that all of the negotiations took place
1987.
between Morgan Bank and the Mexican government.
148 SAIS REVIEW
established another in by the plan were undersubscribed, and the plan ended
as a series of disappointments. The problem is twofold: a luke up
warm commitment by the U.S. government and a lack of adequate in
the and Mexican deal could still serve as a possible model for future swaps
centives for the U.S. commercial banks to participate. Although it failed,
as a catalyst for direct and major involvement by the U.S. govern.
ment in the environmental field. In early March 1989 the Bush adminis.
tration suggested for the first time that commercial banks should forgive
ing move.
a major portion of the $400 billion currently owed; this is an encourag.
Non-governmental organizations like The Nature Conservancy, Con.
servation International, and the National Wildlife Federation have pio.
neered the concept of the debt-for-nature swap and have demonstrated
that it can be done. As the NGOs proceed with more debt-for-nature
swaps, they must also resume a more traditional lobbying role, pushing
the administration and Congress to implement large-scale plans to di-
rect funds for environmental preservation and support activities. Build-
ing off the Mexican model, U.S. bonds could be used to collateralize lo-
cal bonds used to purchase or maintain national parks throughout the
Third World. In other words, the U.S. government would guarantee the
bond payments should the government default.
Simultaneously, an effort already underway in Congress to encourage
the World Bank to "propose environmental structural adjustment lend-
ing to expand the potential long-term economic benefits of conservation"
should be expanded to include co-financing and loan guarantees. 49 The
congressional bill calls for the World Bank's member countries "to set
up two pilot programs: one to make new loans specifically for tropical
forest and wetland protection, and one to allow a country that sets aside
high-value tracts of tropical forest and wetlands to qualify for partial
debt relief from World Bank loans. "50
The concerted involvement of either the U.S. government or multi-
lateral development agencies such as the World Bank would have an im
pact tens, and maybe hundreds of times larger than the NGOs' debt-for-
nature swaps. Only with such a serious commitment from the public sector
can meaningful progress be made in the dual effort to reduce Third World
debt through swaps and arrest the stampeding destruction of natural
resources in the tropics. One may argue, "why should U.S. taxpayers have
to help bail out Third World debtors?" The fact of the matter is that
49. Letter from Congressmen John Porter and David Obey to their congressional colleagues:
"Help Save Tropical Forests; Cosponsor H.R. 3010," September 14, 1987. See also John Porter,
"Paradise Lost?" in Congressional Record (vol. 133, no. 122), Thursday, July 23, 1987.
50. Barbara Bramble, "Swapping Debts for Nature," in International Dams Newsletter vol.
2, no. 5, (September/October 1987), 7.
DEBT-FOR-NATURE SWAPS 149
up
U.S. taxpayers are already sharing the debt burden; the losses reported
luke-
by banks on bad loans reduce the taxes paid by the banks, and therefore
in-
reduce government revenues. Taxpayers pay either way.
failed,
If such efforts by the U.S. government and the World Bank become
swaps
reality, they should rely heavily on the lessons learned through the NGO
overn-
debt-for-nature swaps. Unfortunately, the problem of disparate percep-
ninis-
tions of the value of the biosphere and the wisdom of sustainable de-
orgive
velopment remains. Additionally, as long as vast amounts of money are
urag-
involved, the risks of misappropriation, mismanagement, and oppor-
tunism will persist. As the transactions become larger, sensitivity to mac-
Con-
roeconomic and sociopolitical repercussions must also intensify. Although
pio-
they have been and will continue to be limited in their impact and not
rated
without flaws, debt-for-nature swaps have broken important ground for
ature
hopefully grander and more comprehensive solutions in the future to the
shing
twin problems of world debt and environmental degradation.
0
di-
uild-
lo-
the
e the
rage
end-
tion"
The
D set
bical
side
rtial
ulti-
im-
for-
ctor
orld
ural
ave
that
gues:
rter,
vol.
BUSINESS
Using red ink to keep
tropical forests green
Debt-for-nature swaps can whittle away at
Third World IOU's, but they are no panacea
T
he painted tribes who inhabit Ama-
drum that has long troubled environ-
zonia's Xingú River basin and the
mentalists. Ecologically rich but eco-
pin-striped cadres of the Potomac
nomically indebted nations tend to put
could not contrast more. Yet when it
conservation low on their list of priori-
comes to preserving Brazil's tropical
ties. Development aid often aggravates
rain forests, they stand
the situation by encour-
on common ground.
aging industry to rapid-
Last week, Indians
Equator
ly exploit resources in
from 37 Amazon tribes
order to earn foreign
closed ranks to fight off
Map
exchange to pay interest
detail
a hydroelectric dam
DAVID MERRILL
on the external debt.
that would flood 3,000
At first blush, swaps
square miles of jungle.
BRAZIL
seem the perfect "win-
At the same time, envi-
win" solution, even for
ronmentalists in Wash-
Brasília
an area as vast-and
ington, D.C., and Rio
Mata
politically hot-as the
de Janeiro were ponder-
Atlantica
Amazon. The idea drew
Rio de
ing a variety of ambi-
Janeiro
endorsement in a recent
tious plans to protect a
São
New York Times edito-
different swath of Bra-
Paulo
rial proposing a "grand
zilian forest on the At-
$8 billion] debt-for-na-
0
250
500
lantic coast. Using a
ture swap that would
complicated financing
ease Brazil's burden of
Close shave. Ritualistic threat by a tribes-
wo
deal known as a debt-for-nature swap,
foreign borrowing and preserve the Am-
U.S. and other foreign conservation
azon forests.". At stake is a region that
groups could help save the remaining
contains 10 percent of the world's ani-
forests of the Mata Atlantica, a lush
mal and plant species. The jungle,
coastal forest from north of Rio to south
dubbed the "earth's lung," is also a valu-
of São Paulo state that once covered
able producer of oxygen for a polluted
400,000 square miles. Now greatly
world.
shrunken by urbanization, the remaining
Brazil's stewardship of such precious
forest is still home to the golden lion
resources has recently come under fire.
tamarin, an endangered monkey.
Officials failed to create promised forest
To save the greenery, conservation
reserves along a World Bank-financed
groups would buy as much as $100 mil-
highway through the Amazon. Last
lion of Brazil's crushing foreign debt at a
year, satellite photos pinpointed thou-
deep discount, reflecting creditors'
sands of fires burning simultaneously in
doubts about repayment prospects. As
the Amazon, set by colonists who
with other swaps, Brazil's central bank
cleared the forest for government-subsi-
then would issue cruzado-denominated
dized farming or ranching. The Decem-
bonds in the face amount of the original
ber murder of Amazonian conservation-
debt. That paper gets turned over to
ist Francisco "Chico" Mendes, who had
local environmental groups, which use
been protesting the Amazon's destruc-
the interest for conservation projects.
tion, further tarnished Brazil's image.
Debtors' dilemma. The Mata Atlantica
Still, the question remains whether
swap could be the largest in a series of
America's financial magic can be used to
deals aimed at turning the crippling li-
solve environmental problems as im-
ability of foreign-debt payments into an
mense as those facing the Indians of the
asset for rescuing fragile ecosystems.
Amazon. Even under the most favorable
Debt-for-nature swaps signed with Bo-
circumstances, debt-for-nature swaps
Wide swath. A new road through Amazon rain
for
livia, Ecuador and Costa Rica since 1987
cannot solve the problems of Third
(see box) have poured millions of dollars
World debt, nor does anybody expect
debt, need. In addition, nationalistic
into conservation of wildlife habitats and
them to. Financially complex and politi-
pride and military concerns have proba-
environmental management. The deals
cally delicate, the transactions tend to
bly put the 1.8 million square miles of
appear to be confirming the theory of
exacerbate inflation by adding to domes-
the Amazon region off limits. Recent
former World Wildlife Fund science di-
tic spending, the last thing borrowers
assertions by European and American
rector Thomas Lovejoy. He proposed
such as Brazil, already throttled by hy-
legislators that "the Amazon belongs to
the swaps in 1984, to resolve a conun-
operinflation and a $115 billion foreign
the whole world-not just Brazil" are
48
U.S.NEWS & WORLD REPORT, March 6, 1989
B
S
I
N
E
S
S
Buying Debt,
from a tax or political perspec-
tive," says Gary Caesar, head of
international asset sales at
Saving Nature
BankAmerica Corp. in New
York. Otherwise, the bank's
shareholders might protest.
The Third World gets a
Caesar thinks Bolivia is the per-
fect charity case. Its debts have
ransom for its forests
been discounted to 10 to 15 cents
on the dollar since its economy
collapsed in the early 1980s
from low tin prices and high
n 20 years the forests of the tropics will be
inflation. By contrast, Brazil's
largely stripped bare unless Third World
debt goes for 60 cents on the
countries slow their ravenous logging
dollar, substantially raising the
and mining. Countless species of plants and
cost of a tree's ransom.
animals will die in "the greatest extinction
Environmentalists face a
since the end of the age of the dinosaurs,"
tough sell convincing countries
says Harvard biologist E. O. Wilson. But
with ambitious development
biology lectures carry little clout with poor
plans. Lovejoy argues that the
countries desperate for cash to pay huge
tremendous diversity of life in
foreign debts. Now U.S. environmental
virgin forests may be invalu-
groups are making an imaginative offer to
able in the future to genetic
Third World governments: we'll pay your
WOLFGANG BAYER-WORLD WILDLIFE FUND
debts if you'll spare your trees.
'The greatest extinction: Lovejoy in Brazil
engineers searching for new
drugs or crops. Nations should
The notion won't cure the world's debt or
deforestation problems-but it has had
"protect their biological capi-
and Ecuador recently announced it, too,
tal," he says. But Brazil, which holds Third
some immediate takers. Conservation In-
seeks foreign benefactors. A bill introduced
World records for both debt and deforesta-
ternational, a Washington organization,
recently in Congress would encourage the
tion, is bushwhacking ahead on a vast
struck the first big deal last month. It will
World Bank to suspend loan payments for
buy $650,000 of Bolivia's $4 billion exter-
scheme for highways, farming and iron
tropical countries which protect forests.
production in Amazonia in hopes that the
nal debt at a discounted price of $100,000
"We've just begun to scratch the surface,"
profits will someday far outweigh its for-
from banks eager to dump the mostly un-
says Thomas Lovejoy of the World Wildlife
eign loans. The World Bank, under criti-
collectible loans. In exchange Bolivia will
Fund, the inventor of the swap concept.
set aside 3.7 million acres of Amazon River
cism for financing Amazon projects, is now
Bankers are increasingly willing to trade
negotiating to lend Brazil another $100
country around the existing Beni Bio-
their bad loans for investments in develop-
million, this time for forest conservation.
sphere Reserve, home to endangered spe-
ing nations, but hotels and factories are
Ultimately environmentalists must con-
cies of cats and monkeys. The Bolivians will
more what they have in mind. Swapping for
front another problem: a park in the Third
retain ownership and management of the
national parks "will work only where the
land. Costa Rica is financing its Guana-
World is an island in a sea of poverty. Wil-
banks have written the debt down to next to
liam Conway, general director of the New
caste National Park with a similar deal,
nothing and can claim some real benefits
York Zoological Society, warns that the
preserves will need continuing
subsidies for rangers to save
them from the hungry and the
A Long-Brewing Boycott Ends at Coors
greedy. Bolivia already has 26
refuges and parks that exist
only on paper and do little to
B
ig Labor may be losing its
strike to protest a plan to give
States, has been hurt by
grip on the economy, but
shield wildlife, according to lo-
them lie-detector tests. The
the aggressive marketing
cal environmental activist Ja-
it can still win a barroom
company subsequently hired
of rival beer manufacturers
fight. Last week Adolph
vier Lopez. Recently the Boliv-
nonunion workers to replace
Miller Brewing Co. and the
Coors Co. agreed to let the
ian government charged that
them, and the union was
Anheuser-Busch Companies,
several former cabinet minis-
AFL-CIO try to organize
ousted. Boycotters managed
Inc. To compete with the in-
ters were involved in a scheme
workers at its Colorado brew-
to get the beer banned
dustry leaders, the company
to export 100,000 skins of rare
ery and also pledged to sign a
from many campus hangouts
has had to expand from its
union-approved contract for
mountain pigs to Europe. Con-
and even Boston's Fenway
Western base into the heavily
any future plant construc-
way predicts that Costa Rica
Park-and claim to have cut
unionized Midwest and East,
will run out of firewood in 1990
tion. In return, the AFL-CIO
Coors' share of the California
making it more difficult to do
called off its 10-year boycott
and that scavengers could de-
and Colorado markets by
business as a nonunion firm.
of Coors beer-one of the
scend on its parks. Environ-
more than half.
The labor struggle at Coors
longest product boycotts in
mentalists may learn that the
The settlement may be less
now moves to a new front.
recent history.
Third World has a way of
a testament to labor's re-
The Teamsters and the AFL-
The settlement ended a
turning its debts into the
maining clout than to the
CIO will fight for the right to
confrontation that began in
First World's obligations—
pressures of the competitive
represent the brewery work-
1977, when Coors' then-
something that the bankers
beer market. Coors, the fifth
ers-if the workers want a
could have told them.
unionized workers went on
largest brewer in the United
union at all.
JEFF B. COPELANDWITH
JANE WHITMORE in Washington and
PETER MCFARREN in Bolivia
46 NEWSWEEK: AUGUST 31, 1987
Sharts
BUSINESS
Swaps are no economic panacea. "No
one is offering to cancel $30 billion of
Brazilian debt," observes Massachusetts
Institute of Technology economics Prof.
Rudiger Dornbusch, an expert on Third
World debt. Even if Brazil were to agree
to $1 billion in swaps, 10 times greater
than any proposal now even mentioned,
that would still represent less than 1
persent of the nation's foreign-debt.
Moreover, bonds, which are promises to
pay in the future, merely postpone the
inflationary impact, Dornbusch notes.
Too little, too much. The World Wildlife
Fund and other conservation groups ac-
knowledge other practical limitations.
Large, international groups such as the
Nature Conservancy and WWF cannot
devote the majority of their resources to
nature swaps; they have far too many
other projects. Yet at the same time,
while a half million dollars may be a drop
in the bucket of Third World debt, it can
be overwhelming when focused on a sin-
gle nature-swap project. As new WWF
President Kathryn Fuller has pointed
out, "Enormous sums of new money sud-
denly made available could disrupt home-
grown conservation movements deeply
rooted in local needs and local culture."
Swaps also rely on creditors' willing-
ness to unload debt at deep discounts.
The deals depend on the leverage given
woman to a Brazilian official underscores real threat to jungle posed by planned dam
to every conservation dollar because of
the difference between the debt's face
DEBT-FOR-NATURE SWAPS
value and the amount at which it can be
purchased and converted to local cur-
How they work
rency. But that advantage may be com-
1. Bank holding a country's debt sells it
at deep discount to conservationists and
ing to an end. Banks are sensing that the
writes off face value from taxes.
near calamitous situation of debtor na-1
2 The country's central bank redeems
tions such as Argentina, Bolivia and
the debt and issues local-currency bonds
Brazil may soon force a more sweeping
equivalent to the total debt.
solution to the Third World debt crisis,
3. Debtor-nation conservation organiza-
such as partial forgiveness of loans. As
tions use bond interest to finance local
environmental-protection.projects.
banks increasingly write down their
Where they've worked
Third World debt, its leverage value for
swap purposes is reduced, too.
Boltvia: Conservation International's 1987
redemption of $650,000 in external debt
Environmental groups are aware of the
let government set aside 3.7 million
limitations of debt-for-nature swaps, yet
acres of tropical-forest buffer zone.
remain confident that the mechanisms are
Ecuador: World Wildlife Fund won govern-
valuable when deployed properly, even
ment approval in 1987 to retire up to $10
ultimately in the Amazon basin. Ameri-
million in swaps. Proceeds will go to pro-
tect and manage national parks on the
can conservationists are acting behind the
mainland and on Galápagos Islands.
scenes in Brazil and elsewhere to promote
Costa Rica: $11 million in debt retired
a variety of other deals, advising local
through the Nature Conservancy, WWF
conservation groups on how to draft their
and others in 1987 and 1989 to protect
own proposals. Brazilian conservationists
and augment parklands.
believe the Mata Atlantica swap could
Philippines: WWF recently committed up
to $2 million to swap external debt for
occur within a year or two. "It's time to go
conservation-training funds.
ahead very aggressively with this initia-
ain
forest encourages more settlement
tive," argues Brazilian Congressman Fa-
bio Feldmann. Given the scene at the
galling to President José Sarney, who
azon's ecological value, but we have to
Amazon powwow last week, Brazilian
says he is afraid that debt-for-nature
create 1.7 million new jobs each year
officials may well decide they would rath-
deals would make the jungle an interna-
and must tap its resources. The big ag-
er deal with pin-striped debt swappers
tional arena, a "green Persian Gulf." In-
gressors on the world environment are
than machete-wielding Indians.
terior Minister João Alves, concerned
the industrial nations, which have given
about the nation's wheezing economy, is
us acid rain, most of the greenhouse ef-
by Clemens P. Work and Geri Smith
defensive, too. "We understand the Am-
fect and depletion of the ozone layer."
in Rio de Janeiro
U.S.NEWS & WORLD REPORT, March 6, 1989
49
Futurist, Nov-Dec, 1988
+1
Development
also "ScholarNet: The Beginning of
long-term economic productivity.
a World Academic Community" by
In recent years, debt-exchange
Debt-for-Nature Swaps
Richard W. Slatta in THE
programs have evolved as a means
FUTURIST, March-April 1987,
to help developing countries meet
More developing countries are
page 17.]
their obligations to private banks.
The challenge for the future is to
looking to "debt-for-nature" swaps
Most often, debtor countries un-
to curb tropical deforestation and
integrate these and other interna-
willing or unable to provide the
relieve their debt burden. In these
tional, national, intercampus, and
U.S. dollars needed to repay their
campus networks. The National
swaps, conservation organizations
debts have offered creditors equity
Science Foundation (NSF) has
redeem part of a developing coun-
in domestic businesses.
taken a leading role in providing
try's debt, and in return that coun-
Debt-for-nature swaps involve
motivation and direction toward
try provides funds to protect its
the acquisition of debt by conserva-
the establishment of a "network of
tropical forests.
tion organizations, at a discount,
networks."
Many debt-ridden developing
and its redemption in local cur-
"The NSF has set a goal to pro-
countries are richly endowed with
rency to be used for conservation
vide a national communications
some of the earth's most important
purposes. Such swaps can greatly
infrastructure, enabling collabora-
natural resources, says World
increase the impact of U.S. conser-
Wildlife Fund (WWF), a Washing-
tion throughout the academic com-
vation dollars, since one dollar of
ton, D.C.-based conservation or-
munity and access to shared na-
acquired debt can yield the equiva-
tional resources," says Arms. It is
ganization. Six developing countries
lent of several dollars' worth of
- Brazil, Colombia, Indonesia,
no easy matter, she notes, "to pro-
local currency.
vide access to databases that have
Madagascar, Mexico, and Zaire
Debt-for-nature swaps have thus
been developed for different envi-
together contain about half of the
far been arranged for Bolivia,
ronments or different networks."
world's biological diversity. They
Ecuador, and Costa Rica, and have
National and international aca-
also owe approximately one-quar-
drawn the attention of other Latin
demic networking will be achieved,
ter of the developing world's debt.
American debtor nations, reports
Arms concludes, if those sharing
To increase production and
WWF. There is also interest in Asia,
this vision of the future realize the
boost exports, developing nations
particularly in the Philippines.
fundamental principle behind net-
often clear tropical forests for farm-
European banks are considering
land, pastureland, mining, and
working: cooperation.
using outstanding loans in de-
timber. At the present rate of con-
veloping countries and Eastern
Source: Campus Networking Strategies edited
version, the world's tropical forests
by Caroline Arms. Digital Press, Digital
Europe for conservation purposes.
may be gone in 30 years, according
Equipment Corporation, 12 Crosby Drive,
Bedford, Massachusetts 01730. 1988. 321
to WWF. Destruction of the natural-
Source: World Wildlife Fund, 1250 24th
pages. $30.
resource base is also undercutting
Street, N.W., Washington, D.C. 20037.
Tropical forest being cleared for agricultural land. Debt-for-nature swaps curb deforestation
and help relieve developing nations' debt burden.
RICHARD o BIERREGAARD. JR WORLD WILDLIFE FUND