Taking Belize as a case study, Alejandra Padín-Dujon examines the complex transactions behind ‘debt-for-nature’ swaps and asks whether they are a practicable way to ease debt burdens and encourage environmental conservation.

In 2021, Belize was in trouble. Its debt-to-GDP ratio hovered around 125% and was becoming unsustainable. The country had already defaulted several times in recent memory. To maintain access to international financial markets, a painfully austere loan from the International Monetary Fund (IMF) appeared imminent. Then, at the eleventh hour, a devilishly complex multilateral deal snatched a partial victory from the jaws of defeat.

The deal was called a debt-for-nature swap, and it unfolded like a game of shapeshifting hot potato: with no player willing to hold large quantities of toxic debt for very long, parties took turns buying, selling, or insuring reconstituted pieces of it until (poof!) the debt was manageable, and Belize was saved. On paper, it was an ingenious plan.

In practice, debt-for-nature swaps are costly affairs. The deal saved Belize’s credit rating, minorly improved the serviceability of its debt, and diverted a stream of finance for marine conservation. Simultaneously, however, it overpromised and underdelivered: higher transaction costs, less conservation-for-your-buck.

How the Belize debt-for-nature swap worked

Debt-for-nature swaps involve restructuring sovereign debt in exchange for debtors’ investment in nature conservation. They promise a win-win for economies and the environment by playing a clever game. The series of transactions is easiest to understand in reverse order.

As the final step, investors buy Belize’s restructured debt in the form of de-risked “blue bonds” (so named because they are related to marine conservation).

Before that, the US International Development Finance Corporation (IDFC) de-risks the previously unattractive blue bonds (making them more saleable to investors) by insuring them. In other words: if Belize fails to pay up, the US government will step in.

The Belize Blue Investment Company (BBIC)—an entity of The Nature Conservancy—and Credit Suisse issue the blue bonds to pass along Belize’s unappealing debt, which they hold, to diverse new owners.

BBIC and Credit Suisse hold Belize’s debt to begin with because of an arrangement to loan Belize US$364 million, conditional on new commitments to invest in marine ecosystems. Belize uses this loan to buy back a pricey ‘superbond’ it has issued.

Belize is able to buy its $553 million superbond at a steep discount because the original investors are persuaded to take only 55 cents on the dollar for it, likely in order to boost their own green credentials.

Why the deal was so costly

Briefly, then, Belize owes BBIC/Credit Suisse less than it owed its original investors, and BBIC/Credit Suisse owe the holders of the new blue bonds. The cleverness of this financial finessing comes at an eye-watering price: while the total cost of this series of transactions was originally disclosed at $10 million, it was ultimately closer to $85 million. This $85 million—the discrepancy between the quantity Belize will pay to service its loan and what Credit Suisse will ultimately return to investors in the blue bonds—covers myriad costs and profit margins, like Credit Suisse’s cut, insurance premiums to the IDFC and private-sector reinsurers, and Belize’s interest payments.

The outsized expense of the Belizean debt-for-nature swap compared to the value of the debt is a feature of such complex multilateral processes, where every additional transactor typically stands to gain financially, ultimately at the expense of the debtor country. While the deal successfully averted default or austerity measures attached to an IMF loan, it is not an unmitigated victory.

Other sides to the debt swap story

As with all stories, Belize’s encounter with debt swaps can be seen from many angles. Framed as a method of averting ultimate financial disaster, it was a success. Framed as a solution to high debt burdens in developing countries, the Belize deal was ineffective: all told, it wiped out only 12% of GDP in debt as compared to the 125% burden.

The relatively small amount of debt relief isn’t incidental or unique to Belize: debt-for-nature swaps (and their close cousin, debt-for-climate swaps) are minimally scalable. The sheer size of the debt and number of private actors that must be enticed to participate in a wholly discretionary process is difficult to arrange on even a small scale. As a result, “beneficiaries” of debt-for-nature swaps tend to be small island developing states or other small economies. Two of the most recent, high-profile debt-for-nature swaps include deals in Cape Verde and Barbados.

Finally, however, one must consider the environmental impacts of the deal. Here, it was surely a success, creating fiscal room (or compulsion, depending on your point of view) for investment in oceans. Biodiversity will hopefully flourish, and the people of Belize may benefit from ecosystem services, such as revitalized fish populations for food and livelihoods.

The debt-for-nature swap is a flashy tool that claims to do it all—and does—but not uniformly well, or with uniform benefits across actors. Considering the meagre but critical benefits for highly indebted, small developing economies, do debt-for-nature swaps “work”? That depends. How desperate is your country?

The views expressed in this post are those of the author and do not reflect those of the International Development LSE blog or the London School of Economics and Political Science.

Main Image: A man rakes up seaweed to clean up the shoreline of Ambergris Caye, Belize via Meritt Thomas on Unsplash.