DebtForNature 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 government relative organizations. Their job is to provide guidance and help carry out the administrative maneuvers needed for such a swap.

This type of debt for nature swap is very complicated and has lead conservation groups to look for ways around the jungle of red tape that surrounds these swaps. One type of swap that seems to bypass a lot of these difficulties is an interest swap. The same basic principle applies, but with a twist. The foreign debt is converted into long term bonds by the non government organization and swaps interest payments in return for environmental funding. The debtor nation gets to retire a debt using its own currency, which is diverted to the conservation program. The local currency is injected into the economy over a period of time thereby avoiding the danger of inflation (a big complaint of earlier debt-for-nature swaps). Conservation organizations get some security from inflation and avoid the threat that the debtor nation will renege on its obligations. If the debtor nation stops funding environmental programs, then interest payments resume. Because of the protection and relative ease of this type of swap, it has grown increasingly popular among international conservation organizations.

Sometimes a corporation may donate or discount assets it holds in Latin America because they are unable to profit from them. The corporation writes them off as a charitable donation and the non government organization buys them with diverts funds for environmental protection. This is a good deal for both since the cooperation gets to write the whole thing off and the conservation organization gets more bang for their buck. This also effectively cuts out the US, the board of overseers, and for the most part, the local government. Once inaccessible financial resources are being tapped, a debt is being retired, and government supported environmental initiatives are being started.

All this seems terribly involved and difficult and that is because it is terrible involved and difficult. These swaps are small compared to the overall national deficit and that is because they have to be small. If they were done on a large scale, in the current state of these countries economies, the influx of domestic capital would have a bad inflationary effect on the economy and that is the last thing these economies need.

The recipient countries also fear the loose of their economic sovereignty. The donor organizations and the US negotiators tack on all kinds of stipulations to these swaps. Less than appealing conditions to countries that are already under the screws of the IMF and the World Bank. The IMF knows that they are the last hope for these countries and do not hesitate to impose mountains of economic conditions with their loans. Granted, they are in the interest of neo liberal economic reform but, any changes made in their fragile economy can have a rippling effect that can affect the political stability of an administration. In such a political climate it is easy to understand why many Latin American countries are reluctant to participate in these debt-for-nature swaps when there is a potential loss of their economic sovereignty.

The intention and the idea behind debt-for-nature swaps are noble but, the question comes up, are we really helping Latin American countries by interfering in their affairs? . Is this more bad breath politics? These debt for-nature swaps are likely to only temporarily alleviate some of Latin Americas economic troubles. With these debts retired, they have access to new founds and the cycle of borrowing will continue along the deforestation. So, besides saving the rain forest and protecting the environment, what other plans could the US and other large cooperation s have in mind for these debt-for-nature swaps? This would be the perfect opportunity to take control of valuable natural resources and save them for later use. The debt-for-nature swap is essentially a lease that last until the face value of the debt has been spent on conservation and protection. Then the government takes back control of the land and can do with it whatever they want.

Why not try to hold on to the land as long as possible and wait for better economic and environmental conditions. It is a lot cheaper than buying the land and paying taxes on it and since most financial institutions can not consolidate these countries debts they write it off at face value and sell it on a secondary market for whatever they can. A non government organization takes it from there and does all the real hard work like negotiations and implementation. This is a great way to take advantage of Latin Americas bad economic situation, secure valuable natural resources for latter use, and look like a saint while doing it. This is where the real bargain lies since the debtor nation is held to the full face value of a debt that was purchased at well below its normal value.

While there is a growing initiative among the international community geared towards debt-for-nature swaps they are still difficult and complicated. Especially for Latin American countries that have more important economic and debt related issues in front of them. I do, however, believe that debt-for-nature swaps are a bold step in the right direction for preserving our planets diminishing ecological resources. Even if these swaps are merely a stay of execution, they buy us the time to come up with a better long range plan for rain forest conservation and help ease the staggering debt of these Latin American countries. And despite my questions about the true motives for pursuing debt-for-nature swaps I remain optimistic that these swaps will preserve precious rain forest acres. Debt-for-nature swaps are a valuable tool for preserving the rain forest in Latin America.

WORK CITED

Journal 1. Goethals, Henry. Nature s Dividends . Americas 43 (May-June 1991):

A11204828

Journal 2. Painter, Michael. The Social Causes of Environmental Destruction in Latin

America . Journal of Latin American Politics 28 (Oct 1996)

Journal 3. A Treasure Trove In The Trees . The Economist 312 (Sept 2, 1989):

A7913423

Electronic 1. Dornbusch, Rudigar. Debt Problem: Anatomy and Solutions

http://www-leland.stanford.edu/ sitnikov/DORNBUSH.html

Electronic 2. Osio, Daniel. Debt Swaps Worth a Look .

http://venezuela.mit.edu/listas/atarra teriores/9603/atarraya960317/0022

.html

Electronic 3. United Nations Environmental Program State Of The Environment Report

1997 . Global Environmental Outlook-1

Electronic 4. White House Fact Sheet on the President s Proposal for Global Forest

Convention, July 11, 1996.

http://www.csdl.tamu.edu/bushlibrary/papers/1990/90071103.html