DebtForNature Swaps In Latin America Essay Research

Debt-For-Nature Swaps In Latin America Essay, Research Paper

Latin America is currently in a debt crisis. Poor management, over lending by banks, and a bad turn in the world economy has produced severe debt that is forcing these countries to exploit their natural resources in an attempt to ease their economic problems. However, many individuals and organizations have seen a silver lining to this cloud and are now buying debts (at a discounted rate) and giving them back to the debtor countries in return for environmental protection. Although increasingly difficult to achieve, these debt for nature swaps are beneficial to the debtor country and the world.

Why are we going to all this trouble and spending all this money to help out small Latin American countries that are not even big players in the world market. I discovered that we loose about 40 million acres of forest a year and 27 million of that is tropical rain forest. (White House fact sheet on the President s Proposal for a Global Forest Convention). Considering that the worlds forest act as a respiration, filtration, and cooling system we must make a concerted effort to conserve and to start repairing the damage we have done. A large part of the worlds forest rest in the debt ridden countries of Latin America. In an attempt to repay these huge debts, countries are utilizing their natural resources and straining them to the point where their situation could have global ecological ramifications. There is an undeniable link between the deforestation in Latin America and its enormous debt. Debt-for-nature swaps take advantage of an otherwise bad situation, turn it around, and use it to promote forest conservation in Latin America.

The first debt-for-nature swap was with the government of Bolivia and the non government organization Conservation International in 1987. Since then, the international community and the United Nations have picked up the idea and are now incorporating it in many of their initiatives and policies directed toward forest conservation in Latin America. To date there have been many substantial funds swapped for environmental protection in a number of Latin American countries.

In a debt for nature swap an organization buys a debtor nations foreign debt at a discount ( since most of the worlds financial organizations are eager to unload them) and then forgive it in exchange for a commitment by the country to invest the face value of the debt in environmental conservation. The debt is converted for US dollars to local currency, which is used to fund the programs. This alleviates the debt, and proves a bargain to the organization that initiated the swap (most debts are discounted more than 50% on the secondary markets). They also receive higher visibility and these types of transactions get them involved in the local government allowing them to pursue future programs. Commercial banks also see a potential in debt for nature swaps. Instead of holding on to a debt that will more than likely never be paid, they donate it to a non government organization and write it off as a charitable donation. A viable solution since commercial banks cannot write off a debt consolidation and even if they could , they would lack the reserve to do so. A take the money and run attitude that has been adopted by many banks. More recently, due to a change in international policy, they can not only sell the debt at a discount (recouping some of their loss) , but write it off at face value and gain prestige for their involvement in environmental protection.

The role of the debtor nation is a bit more difficult. The debtor nation must agree to essentially buy back the debt at face value by financing the eviromental conservation programs with money converted into local currency and pay all additional cost involved in the transaction like negotiation fees, implementation fees, ect. Not a bad deal for the debtor nation considering they would have had to pay the initial cost many times over just in interest payments alone. The USDA forest service says, The debtor nation consents to the swap terms; bear the cost of: 1 the buy back of the debt from the charitable organization and 2 additional project financing commiserates with the differential between the discount price on the secondary market and the exchange rate for debt converted into local currency. In addition, the project may entail future recurrent expenditures for the host country s public sector.

(White House Fact sheet on the President s Proposal for Global Forest

Conservation)

almost all swaps have some US involvement. Usually we act as the sugar daddy, financing non government organizations and setting up regulations that the debtor nation must meet. In 1990 the US established these regulations under Title VI of the 1990 fact act. The debtor country must be making progress toward the establishment of certain world bank reform programs (getting rid of subsidies and selling off government owned businesses) and be making reforms in the foreign and domestic investment area. The debt swap between the non government organization and the debtor country is negotiated by the US. In exchange for forgiveness of the debt the debtor country must make interest payments into the project, which is governed by a local government body. The body which negotiates the swap is composed of relative US government organizations and some non