The Tribune

By CHRIS ILLING

CCO @ ActivTrades Corp

Prime Minister Philip Davis KC was in the UK last week and spoke at the Caribbean Council reception in London, where he said once more that about 40 percent of the county’s $11bn-plus national debt was the result of post-hurricane repairs and restoration efforts. He stated further that climate change is the greatest threat that The Bahamas is facing. But this battle against climate change is a costly endeavour, and the country must be innovative in creating new sources of income and reducing the crippling debt it is faced with.

One way to create new income is the development of a market for blue carbon credits and monetising the natural carbon sinks, such as mangroves and seagrass beds. Another way to reduce the ever-growing burden, instead of increasing earnings, is to reduce the national debt. An example of how to do it was made public last week when the troubled bank, Credit Suisse, bought back Ecuadorian government bonds on a large scale. Behind the $1.6bn deal is what is arguably the largest debt for nature swap (DNS) to-date.

The idea behind the DNS mechanism - published for the first time in the New York Times in 1984 by the vice-president of the World Wildlife Fund (WWF), Thomas Lovejoy - seemed to be a win-win solution: On the one hand, it promised to reduce the mountain of debt threatening to suffocate many nations. On the other hand, it sought to improve a country’s environmental status. The first wave of DNS, which began in Bolivia in 1987, was a mechanism in which an intermediary organisation, usually an international non-governmental organisation (NGO) with environmental and social objectives, bought up the foreign debt of a highly indebted country at a significantly reduced value in relation to its nominal value. In a second step, negotiations were started with the debtor government, in which that government declared its willingness to invest in social and environmental projects using local currency. From 1990 onwards, several bilateral DNS appeared, in which creditor and debtor governments in direct contact without the private intermediary role of an NGO negotiated conditional debt forgiveness against social and environmental programmes.

Now, Credit Suisse has bought back Ecuadorian government bonds with a face value of $1.6 bn. This was announced by Ecuadorian bankers on Thursday last week. The notes were trading deep in distress on the secondary market, which allowed the bank to pay the original investors less than par. The buyback will free up cash that Ecuador will invest in preserving the Galapagos Islands, one of the world's most valuable ecosystems. The bonds had fallen sharply in value due to Ecuador's political difficulties, and Credit Suisse - itself in the process of being acquired by UBS in a forced rescue - saw the opportunity. Credit Suisse states that Thursday's buyback saw just over $1bn in face value of Ecuador's 2035 bonds repurchased at 38.5 cents on the dollar, $202m of a 2030 note bought at 53.25 cents and $420m of a 2040 bond bought at 35.5 cents. The buyback lowers Ecuador’s debt service costs from $16.5bn to approximately $14.9bn, which is a 10 percent reduction on the debt stock.

Climate change is real, and the vicious circle of environmental destruction is turning faster and faster. The COVID pandemic, rising prices for energy and grain, and supply bottlenecks in exports are driving up the foreign debt of many developing countries. If this trend is to be stopped, politics must break out of the prevailing financial logic. Creditors should forgive developing countries at least part of their external debt in return for leaving resources in the ground and protecting more of nature. Keep on raising your voice, Prime Minister.