What Are Green Debt Swaps?

Green debt swaps may or may not make sense for many countries in a world swimming in debt. But are far from easy to execute.

Many countries are in debt, a few of them have bargaining power due to military, soft power, resources, and reserve currency status, like the United States, others are not so lucky. Those like Argentina, and other countries with large debt levels do not have the political sway and other factors working out for them. But they are in a bit of a pickle. They have to account for their debts and they must deal with it. Argentina, for instance is one country that has had to deal with its debt, its struggling though and its people suffer even more. When a country like Argentina has a great deal of debt, and find that it is hard to pay it off, it usually goes through a period of intense suffering.

Argentina has been suffering for quite a while now, COVID-19 has not helped, more Argentinians are in poverty and more are unemployed. The nation had to go through relative austerity measures and that is partly why the poverty and unemployment rates are up. But the IMF, the supranational organization that Argentina owes money to, may not be able to ask for austerity during extraordinary times, such as that of COVID-19 where countries all over the world went into varying states of lockdown.

A few countries can bounce back because of the strength of their currency and cache in the world, they may have a reserve currency or they may produce quite a bit of goods for the rest of world and are “essential in more ways than one”, others, not so much. Unfortunately for Argentina, it does not have the best national hand of cards. That is why it is leaning into the idea of green debt swaps but what are green debt swaps? Here is what you need to know.

What You Need to Know about Green Debt Swaps

Green debt swaps are a way for struggling debt laden low income countries to implement environmental and similar policy matters and contribute to green initiatives. The simple concept of debt swaps is present below. It would work in a situation where the debtor, in this case, Argentina, cannot repay. The debtholder would purchase the debt at a discount. The debtholder would conduct a partial elimination of the amount owed and the debtor must then allocate a portion of the amount in their current currency to the initiatives that the debtor requires.

These debt swap arrangements usually take place in debt restructuring situations where the debts are tied to the public of the country and where there are various creditors. These countries that qualify for this financial arrangement must meet certain rules or criteria imposed by the IMF.

The debtor nation must also be able to show that it does not have any other financial options and that it does have the ability to deploy a specific portion of its resources to initiatives that will provide the right environmental value for the country, for the larger area or for the world.

But green debt swaps are hard to pull off because both parties must agree on the terms and the debtor nation must be able to execute on the agreement. That means that it will conduct feasibility research, possess robust fiscal strength, and have the ability to show that it will remain transparent and credible in its domestic investment and expense endeavors. Also known as debt for environment swaps, it is a financial instrument that is meant to work with countries that can play ball in the larger environmental initiatives set forth by the debtholders.

It would mean that the debtor nation would have to comply with the policies and requirements of the debt swap originator, the debt holder and implement countrywide policies and conduct the right financing to achieve certain goals.

Green Debt Swaps Are Not a New Idea

The idea of green debt swaps have been tried before in the early 2000s. According to the OECD, both Georgia and Kyrgs Republic were able to start the process for these options. Both sought to get started with the proper set up, the potential ways to approach the debt swap for environment arrangement and how they would have to spend the resources.

But the countries did not move forward due to issues with the arrangement.

Poland and Bulgaria were two nations that did implement such swaps and Brazil worked with the United States to implement similar initiatives. The United States has done similar deals with a slew of other countries. More of these deals are likely to take place and Argentina may be one of the nations to enter into such an agreement in late 2021 or in early 2022.

China May Benefit From These Green Debt Swaps As It Holds Debt With Regard to Many Countries

China has gone all over the world from the Caribbean to Europe and Africa handing out debt or conducting infrastructure deals where the nations take on an enormous amount of debt. A portion of these nations may not be able to pay off the debt and may need to turn to creative solutions such as green debt swaps. But seeing as how the debt holder has the ability to dictate terms, it can certainly benefit China. The scales are already tipped in China’s favor but these green debt swaps may place a more friendly and green face on these deals.