Spain and World Bank in push for wider use of 'debt swaps'

By David Latona and Virginia Furness

SEVILLE/LONDON (Reuters) -Spain has partnered with the World Bank to help poorer countries free up money to spend on development and conservation via debt "swaps," the country's Ministry of Economy said on Tuesday. 

With rich governments cutting official development aid and many countries struggling with their debts, nations are trying to find creative ways to fund projects ranging from protecting coral reefs to paying for schools. 

The Global Hub for Debt Swaps for Development, launched at the UN's Finance for Development summit in Seville, will provide technical and financial assistance to countries eyeing debt swaps for food security and climate change adaptation, the Spanish government said. 

Nations from Barbados and Belize to Ecuador and Ivory Coast have all used debt swaps in recent years, buying back more expensive loans or bonds and securing refinancing deals with cheaper rates.

There have been roughly $6 billion worth of debt-for-nature swaps - transactions in which a country's debt is reduced in exchange for a commitment to invest in environmental conservation - in recent years. Development banks often play a crucial role by providing guarantees or risk insurance that brings down the cost of swapped debt and generates the savings.

Critics say such deals can be time-consuming and complex, which has prevented more widespread adoption of a tool advocates say is critical to helping countries reduce debt burdens and address development issues.

"We have heard loud and clear the message from many countries: we need practical tools that make debt swaps simpler, faster and more accessible," Spain's minister of Economy, Trade, and Business, Carlos Cuerpo, said. 

Spain will contribute 3 million euros ($3.54 million) to support the Hub, while World Bank President Ajay Banga said it would host a "multi-partner trust fund to finance technical assistance".

TIMELY

The push comes at a timely moment for the debt swap market amid concerns that crucial U.S. backing for such deals - particularly those with a climate or nature focus - could largely dry up under President Donald Trump.

Still, demand for broader development swaps remains strong, Inter–American Development Bank President Ilan Goldfajn said at a news conference in Seville on Tuesday. 

The IDB has backed five of the last nine major debt-for-nature swaps, many of which were done alongside the United States' International Development Finance Corporation.

"We are getting demand for debt for education, debt for health," Goldfajn said. "Those are things that have been under construction. Let's see how they evolve."

In an effort to spur wider adoption of debt swaps, a set of conservation groups, investors, development bankers and lawyers who have spearheaded the growth of the nature-swap market also published a best-practice guide for such deals.

It included guidance on who should use debt swaps, and how. 

Melissa Garvey, a director at the Nature Conservancy, which was one of the lead contributors to the how-to-guide, said debt swaps were now a "proven model to finance conservation at scale."

($1 = 0.8470 euro)

(Reporting by Virginia Furness in London and David Latona in Seville, Spain;Additional reporting by Marc Jones in London; Editing by Sharon Singleton, Paul Simao and Matthew Lewis)