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Blue bonds could be a solution for climate change and debt for some countries

A MARTÍNEZ, HOST:

The climate crisis has been hitting low-income countries especially hard. We heard that throughout the U.N. climate summit in Egypt that just wrapped. These governments are also facing swelling debt as interest rates rise around the globe. Could blue bonds solve both problems at once? Wailin Wong and Darian Woods from our daily economics podcast, The Indicator, explain.

WAILIN WONG, BYLINE: Last month, the United Nations identified 54 countries in need of urgent debt relief. The U.N. said about half of those countries are also some of the most climate-vulnerable nations in the world.

DARIAN WOODS, BYLINE: These countries don't have the money to service their debt and invest in climate-related infrastructure. Daniel Munevar is an economic affairs officer at the U.N. Conference on Trade and Development.

DANIEL MUNEVAR: Climate change not only is affecting negatively the income of countries but is also imposing additional cost as a result of extreme climate events. Because of these linkages, the climate crisis - it's also making the debt crisis worse.

WONG: The Nature Conservancy wanted to tackle the climate and debt problems together, so they turned to something called a debt-for-nature swap. Basically, they would help governments swap old debt for new debt with lower interest payments. This debt conversion would then free up money for conservation efforts.

WOODS: These debt-for-nature swaps were briefly in vogue in the late 1980s and early 1990s after the Latin American debt crisis. Then, environmental groups helped countries like Bolivia and Ecuador get debt relief in exchange for conservation commitments.

MUNEVAR: The Nature Conservancy revived the debt-for-nature swap in 2016 with a deal in the Seychelles. It did another swap in Belize last year and then a $150 million deal in Barbados this year. The deals all involve something called blue bonds because the country's promise to protect at least 30% of their ocean areas.

WOODS: And so here's how the Barbados debt swap worked. First, the government contacted investors holding the old debt. Then they offered to buy back some of those bonds. Slav Gatchev heads the sustainable debt team at The Nature Conservancy.

SLAV GATCHEV: Just like the homeowner refinancing their house, if you go to your current bank and say, hey, I want to pay you back, the bank will say, wonderful. Where's the cash? Show me the money.

WOODS: And that's where The Nature Conservancy comes in. They paired up with Wall Street banks and another group, which was the Inter-American Development Bank, and they sold new bonds to investors called the blue bonds. And the proceeds of these blue bonds were then used to cash out the old bondholders.

WONG: Now Barbados is on the hook for this new debt, but the new debt has much better terms. The Nature Conservancy and the Inter-American Development Bank also took a risk. They agreed to guarantee the debt, stepping in if Barbados can't make the payments.

WOODS: All told, the debt swap generated $50 million in savings for Barbados. This is the money that the country is using for large-scale long-term projects to protect its oceans. Slav at The Nature Conservancy acknowledges that debt swaps are just one tool, meant to complement traditional philanthropy, like grants and donations. But he said the enormity of the climate crisis means financial markets have to get involved in fixing it. And so these debt swaps are designed to attract investors of all kinds.

WONG: Which side are you appealing to, kind of their profit-seeking side or their climate conscience?

GATCHEV: Ideally, it's both, right? But, of course, we love the fact that people see these instruments as aligned with their green investment targets, and we want to see more teeth to those targets.

WONG: Wailin Wong.

WOODS: Darian Woods, NPR News.

(SOUNDBITE OF MR. PAUER'S "TAMBOR") Transcript provided by NPR, Copyright NPR.

Wailin Wong
Wailin Wong is a long-time business and economics journalist who's reported from a Chilean mountaintop, an embalming fluid factory and lots of places in between. She is a host of The Indicator from Planet Money. Previously, she launched and co-hosted two branded podcasts for a software company and covered tech and startups for the Chicago Tribune. Wailin started her career as a correspondent for Dow Jones Newswires in Buenos Aires. In her spare time, she plays violin in one of the oldest community orchestras in the U.S.