MDBs work on multi-country debt swaps for Caribbean countries
Discussions are in the final stages to set up a mechanism supported by multilateral development banks to undertake sovereign debt swaps on a regional scale across the Caribbean.
Several countries in the region, such as Barbados, the Bahamas and Belize, have carried out individual swaps, persuading investors to exchange their conventional instruments for new paper backed by international agencies with higher credit ratings.
Now an initiative by the Caribbean Development Bank and the Inter-American Development Bank is proposing to carry out swaps for countries across the whole region, potentially transforming the debt landscape of its nations, most of which have small economies.
“This should be welcomed by the market,” said one sovereign financial adviser. “Investors love debt swaps as they can see a way of selling their existing positions in exchange for more highly rated paper, which potentially should be more liquid.”
A US-based responsible investor said a regional proposal could make sense, especially for small sovereigns.
"One of the challenges is a lot of the countries that do have debt burden issues aren't necessarily large enough to do a transaction on their own. So you could do things like a regional transaction or some type of blending of risk profiles," said the investor.
The CDB and IDB signed an agreement earlier this month at the CDB’s annual meeting in Brazil, launching the idea of a “multi-country debt exchange” that they called “unprecedented”.
Mia Mottley, prime minister of Barbados, is chair of Caricom, the community of Caribbean nations, and has asked IDB to lead the initiative, which it has called “a first-of-its-kind regional standardised debt-for-resilience multi-country swap programme”.
“This initiative will unlock fiscal space, strengthen resilience and channel savings into regional public goods. This new framework would help bring scale, transparency, and efficiency – crucial for small states that face high costs in such transactions,” IDB said.
Mottley first aired the idea in October before becoming chair of Caricom. A similar multi-nation swap has been suggested for East Africa.
Fleshed out
The Caribbean debt swap is expected to be fleshed out at the United Nations’ International Conference on Financing for Development, taking place in Seville, Spain, from June 30.
The draft UN agreement, to be signed this week, calls for support in “scaling up debt swaps” to help meet sustainable development goals for climate and nature and in “maximising their impact” by simplifying their design, reducing transaction costs and strengthening country ownership and transparency.
Sorting out the finer details will be critical. "If you're doing education in one country but coral reef restoration in another, is that beneficial to the overall structure, because you have different underlying risk profiles?" the US responsible investor said.
"What happens if one country defaults but the other one does not? So you have, ultimately, this issue of sovereignty," said the investor, pointing out that it may be more problematic than the simple swaps by individual countries seen so far.
"You may have to think about if there is some way to create more of an asset-backed structure where there may be very specific pledges that are made, so that in the event that one country is unable to fulfil its obligation, you're able to obtain collateral of some sort.
"That gets you away from the concern around sovereign A not wanting to be responsible for sovereign B's debt, because that's ultimately what the issue is when you start blending transactions," said the investor.
CDB and IDB have also pledged to work together on a trade finance guarantee programme.
“This partnership and the trade finance guarantee programme will enhance access to trade investment across the bank’s member countries, crowd in private sector resources, foster economic growth and deepen regional integration,” said Lisa Harding, division chief for the private sector at CDB.
CAF – Development Bank of Latin America and the Caribbean and the World Bank are also involved in talks, said the financial adviser.