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DEBT-FOR-NATURE SWAPS:_ DEBT RELIEF AND BIOSPHERE PRESERVATION? Stephen VanR. Winthrop !rushing debt obligations and a rapidly deteriorating natural environment are two of the most serious problems confronting many less developed nations (LDCs) today. An innovative attempt to "kill two birds with one stone" —to alleviate both of these problems simultaneously—emerged in 1987 in the form of the "debt-for-nature swap." This technique is intended to relieve the relentless pressure on LDC central banks to drain precious foreign exchange by reducing part of the debt obligation (the commercial banks absorb some losses), and allowing debt payments in local currency instead of U.S. dollars. It also seeks to provide local conservation organizations with vital funds for the purchase of lands to be converted into national parks and for the establishment of endowments for research, maintenance, and protection of the parks. The Debt Problem The magnitude and complexity of the global debt problem preclude a monolithic solution and have forced the international financial community to scramble for innovative ideas. In Peru some debt was retired by a lending bank in a barter exchange for iron ore and coffee. ^ Another more broadly applicable solution is the "debt-equity swap." While actually 1. See Latin American Weekly Report, No. 87-88 (November 1, 1987), 7. Stephen VanR. Winthrop is a management consultant at Strategic Planning Associates, an international consulting firm. He graduated from the SAIS/Wharton MBA/MA program in 1988. 129 130 SAIS REVIEW a somewhat misleading term when also used to describe exchanges of debt for cash, bonds, and even other debt, the debt-equity swap evolved out of one of the principal laws of economics: "markets work." In essence , swaps allow a foreign investor to purchase local currency at a discount , which in turn is used to acquire equity in a local business. Most banks have been highly secretive about the swap programs in which they have engaged. All banks and other businesses deal with "bad debt" in two stages. First they estimate how much of the debt on their books will not be collected, establishing a loan loss reserve. At some later date, the institutions will then decide to write off particular pieces of uncollectable debt (this happens when the debt is sold at a discount or deemed uncollectible). Prior to 1986, Generally Accepted Accounting Procedures (GAAP) required that all similar loans (that is, other loans to the same country) be readjusted to market value after one piece of debt was used in a debt swap or sale. This is significant because banks might be forced to write off too much debt, too quickly. Even after accounting standards were changed, allowing other debt to stay in the bank's books at differing levels of discount, banks remained secretive about the swaps because they feared their bargaining power with other debtors would be undermined if the specifics of the swaps were known.2 Estimates are that the debt swap market is small but growing: about $1 billion (face value) in 1984, $3 billion in 1985, and $6-7 billion in 1986; although no data are available for 1987, it appears as if this trend may be decelerating.5 Debt-equity swaps were engineered to perform the same function as a debt restructuring in a corporate bankruptcy proceeding: to reduce the burden offuture debt payments by distributing some ofthe company's equity to its creditors. Some bankers intoned that Latin American countries had acquired too much debt in the 1970s and not enough direct investment, and that debt-equity swaps corrected that imbalance. Whether or not this argument is valid, it must be stressed that debt-equity swaps, like corporate restructurings, are not purely debt relief, but rather (at least in part) debt conversion. AU obligations are not being removed; instead, some are merely being given a new identity. A flow of interest payments is being replaced by an anticipated flow of(repatriatable) dividend payments. This key point resurrects the ugly specter ofneocolonialism : foreign-owned companies (so dependency theory states) drain the resource-rich, capital-poor LDC and ensure the perpetuation of a cycle 2. See Financial Accounting Standards Board, Accounting Standards (New York: McGraw HiU, 1986...

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