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Debt-for-Climate Swaps Make Sense

The COVID-19 pandemic has left most low-income countries in or on the verge of debt distress, just as the urgency of the climate crisis has become clear for all to see. Though solutions to each problem are not always fully aligned, instruments for addressing both simultaneously should be on the financial menu.

GENEVA – What if there was a magic bullet to address the climate crisis, the pandemic-induced debt crunch, and the need to boost development finance all at once?

It certainly is attractive to try to tackle these issues jointly, because we already need to mobilize climate finance from rich countries (the main polluters) to support low-income countries (who will bear a disproportionately large burden from climate change). European Commission President Ursula von der Leyen has said that “major economies do have a special duty to the least developed and most vulnerable countries,” and International Monetary Fund Managing Director Kristalina Georgieva said that “it makes sense” to seek to address debt pressures and the climate crisis jointly. The idea is to arrange “green debt swaps.”

The idea is not new; something similar has been tested since the 1980s. During that lost decade, so-called Brady bonds were the main item on an international “menu” of debt-restructuring instruments. Debtors used official loans from the IMF and the World Bank to acquire US Treasury bonds as collateral, allowing them to exchange existing bank loans at a heavy discount for tradable, guaranteed Brady bonds. “Debt-for-nature” swaps were also on the menu during this period, but they were side dishes.

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