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EU’s lending arm eyes first ‘debt-for-nature’ swap

The first EIB deal is expected to be finalised around the end of the year or start of 2024

The European Union’s (EU) powerful lending arm, the European Investment Bank, expects to back its first ‘debt-for-nature’ swap this year as it bolsters efforts to stem biodiversity loss.

Debt-for-nature swaps, which help countries cut their debt in return for conservation commitments, are attracting growing interest after Ecuador’s record $1.6 billion deal last month to protect the Galapagos Islands.

“We are working with a number of countries,” Maria Shaw-Barragan, a director of lending at the ‘EIB Global’ arm of the bank that lends outside the EU, told Reuters.

Multilateral development banks play a crucial role by providing “credit guarantees” that allow cash-poor governments to borrow cheaply – savings which are then funnelled into protecting ecosystems from barrier reefs to rainforests.

Due to the EIB’s vast firepower – its balance sheet is more than double that of the lending arm of the World Bank – its entrance into this pocket of finance has long been on the wishlist of those wanting a rapid increase in debt swaps.

Shaw-Barragan declined to name the countries and likely amounts involved to avoid impacting bond prices – debt-for-nature swaps work best when existing bonds are bought on the cheap – but estimated that there were 5-10 possibilities in sub-Saharan Africa alone.

Zambia and Ghana are in default which is likely to rule them out, but bankers highlight that bonds issued by Angola, Kenya, Nigeria, Uganda, Senegal, Ivory Coast, Rwanda, Mozambique and even South Africa are all under pressure.

The first EIB deal is expected to be finalised around the end of the year or start of 2024, Shaw-Barragan added, or “in the next 12 months” at the very latest.

There should be another two not long after and the bank could be involved in as many as five a year once other parts of the world are included.

Biodiversity challenge

Halting the rapid decline in global biodiversity is an increasingly pressing focus for world leaders who have committed to protecting 30 percent of land, coastal and marine areas by 2030.

Debt-for-nature swaps are not new but could play an increasingly important role. There have been about 140 over the past 35 years although they have only involved around $5 billion of debt, even including last month’s super-sized Galapagos deal.

They are set to receive more backing at a summit in Paris on Thursday hosted by French President Emmanuel Macron and Barbados’ Prime Minister Mia Mottley, whose own country did a debt-for-nature swap last year and has been calling for more.

The sharp rise in global interest rates has sparked fears of a major wave of debt crises. A staggering 21 developing world countries with a combined $240 billion worth of debt now have bonds trading at “distressed” levels.

Shaw-Barragan said the EIB wouldn’t get involved in countries already in default. Instead the swaps will help governments replace short-term debt with new 10- or 15-year debt at lower rates than they could otherwise secure.

“Lengthening the tenors and grace periods are very important for countries right now,” Shaw-Barragan said. “It can make a huge difference.”