Barbados is set to become the first nation to use a new standardised debt-swap facility as reported on today’s regional pages, aimed at helping multiple countries use money for development projects instead of high-interest loan payment. Dubbed a “debt-for-resilience” facility, the multi-billion-dollar set-up is backed by four major development banks and is expected to see two or three more countries in the Caribbean region, where it is focused, sign up by year-end.
Under the programme, the countries would buy back packets of their most costly government bonds from the open market. They then cancel them and issue new ones with a significantly lower interest rate thanks to the development banks’ credit guarantees that effectively reduce the risk for bond buyers.
Debt swaps have become increasingly popular in recent years as a way for developing countries to replace expensive government debt with cheaper bonds, and use the savings on projects such as environmental conservation, schools or infrastructure. However, the new debt-for-resilience mechanism is said to be a leap forward, as it largely standardises many of the legal and transactional complexities that have meant some recent swaps have taken years to execute and produced relatively modest debt savings.
Barbados will have to say what it will spend the money on beforehand, but the resilience tag gives it wide scope on what the projects can be. The four multilateral development banks involved are the Inter-American Development Bank, the World Bank, CAF and the Caribbean Development Bank. Well over a dozen countries in and around the Caribbean will be eligible to use the facility, although their national debt has to be judged as broadly sustainable in order to do so.
St. Maarten too could benefit from a similar arrangement for its debts to the Netherlands. The Kingdom Council of Ministers RMR recently approved refinancing a loan of 73.5 million Caribbean guilders due to expire in October, but these repayments and others will still remain a heavy burden on the national budget.
Prime Minister Luc Mercelina is among those who have called for swapping debts with efforts to mitigate the impact of climate change including rising sea levels. This is considered a more feasible alternative to debt cancellation of forgiveness, which does not enjoy much political support in The Hague.
Now that an immediate debt-related threat to financial stability has been averted, it is time to take the next step.
