Financial Post, Weekly edition, Tue 16 Jul 91, page 10. Editorial.

Debt swaps worth a look

Brazil's $1.5-billion debt-for-nature swap, likely to be considered by the G-7 leaders at this week's economic summit, is peanuts relative to its total foreign debt of US$123 billion. It does, however, dwarf other debt-for-nature swaps and has important implications for global environmental policy.

To date, US$90 million in foreign debt has been redeemed through debt-for-nature swaps. For example, in 1989, the World Wildlife Fund bought US$9 million of Ecuador's debt and will help Ecuador develop and manage parks.

Debt-for-nature swaps aren't likely to make much of a dint in Latin America's foreign debt overall. Donors have to be found willing to buy debt in exchange for environmental projects.

However, Latin American debt is a bargain for donors. The WWF, for example, paid just under US$1 million for the US$9 million debt it took over. Donors convert the face value of the foreign debt to domestic currency and use it locally to fund environmental conservation projects. Even with the help of these discounted rates, the amount of debt exchanged so far is a pittance relative to the total.

There can be problems from the standpoint of the recipient countries. They have to meet certain environmental conditions in exchange for the debt swap. Until recently, Brazil opposed swaps because of the loss of economic sovereignty it entailed.

Done on a large scale, swaps could be inflationary. The agency purchasing the foreign debt gets its face value converted into local currency and then that local currency is injected into the local economy - more money chasing unchanged output.

The central bank of the countries involved could conceivably neutralize some of these inflationary consequences by appropriate adjustments in the growth of money supply. Or, instead of converting the entire amount involved into domestic currency at once, it could pay it out in instalments, as if it was repaying domestic debt.

The face value of foreign debt in Latin America exceeds US$420 billion, 55% of it owed to private-sector banks. (On secondary markets, it's worth less.) Banks have been writing off the debt and are going to have to write off a great deal more. Ultimately, the effects will ripple out to all of us in countries where those lenders are based, either as shareholders and/or taxpayers.

If Brazil's debt-for-nature swap is to work it will require tough negotiations and co-operation amongst donor nations, private holders of Brazilian debt and the government of Brazil. It deserves support, because it would be the biggest trial run to date for something that may be worth doing on a much broader scale. It could be a way of converting crushing debts which may never get paid, into something essential to the survival of the planet.

	This information is provided by the Financial Post.
	Please send comments to: g8@utoronto.ca Revised: June 3, 1995

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