Debt for climate swaps: exploring avenues and opportunities

The document explores Debt-for-Climate Swaps (DFCS) as a tool to break the 'Climate Crisis-Sovereign Debt Doom Loop' in Emerging Markets and Low-Income Developing Countries. It details bilateral and multipartite DFCS structures, analyzing their advantages, costs, and the role of credit enhancements. The report proposes a quantitative model to identify suitable countries across Africa, Latin America, the Caribbean, and Asia-Pacific, and outlines how the GCF can intervene through financial support, technical assistance, and stakeholder coordination.

• Low-Income Countries (LICs) are facing a severe debt crisis, with 10 countries in debt distress and 25 at high risk, which limits their fiscal space for climate investments. Global public debt reached 85 per cent of global GDP in 2019, and debt-to-GDP ratios in Emerging Markets (EMs) and LICs are expected to rise from 67 per cent in 2023 to 75 per cent by 2028.
• The 'Climate Crisis-Sovereign Debt Doom Loop' occurs when climate shocks cause economic disruptions and fiscal pressures, increasing borrowing costs and refinancing risks, which in turn reduces the resources available for adaptation and mitigation, further increasing the probability of sovereign default.
• DFCS are categorized into bilateral structures, which are streamlined and often used for official government-to-government swaps, and multipartite structures, which can generate larger savings by leveraging the private sector and third-party players like NGOs and IFIs.
• Multipartite DFCS Structure 2.2 allows a sovereign to buy back its own debt at a discount using new financing from commercial investors, supported by credit enhancement mechanisms. This structure can treat high volumes of debt, as seen in recent operations in Belize, Barbados, Ecuador, and Gabon, where USD 2.8 billion of debt was treated.
• Credit enhancement mechanisms, such as guarantees and political risk insurance, are essential for mobilizing private capital by improving the risk-return profile of instruments. MDB guarantees are particularly effective, mobilizing an average of USD 1.5 of private capital for every dollar of MDB capital.
• The success of DFCS depends on the quality of underlying projects, requiring 'additionality'—meaning ecological or climate results that would not have occurred without the swap. Key success factors include alignment with National Adaptation Plans (NAP) and Nationally Determined Contributions (NDCs), and the use of endowment funds for sustainable long-term financing.
• The report utilizes a quantitative model to rank suitable countries based on three pillars: Environment (35%), Debt and Macroeconomics (45%), and Institutions (20%). Top-ranked countries include Ghana, Lao P.D.R., Rwanda, Kenya, and Vietnam.
• The GCF can strategically position itself by providing direct funding for buybacks, offering credit enhancements (such as guarantees or through a Special Purpose Vehicle), providing upfront concessional loans for large capital expenditures, and offering technical assistance for project identification and monitoring.

APA

Green Climate Fund (2024). Debt for climate swaps: exploring avenues and opportunities. https://www.greenclimate.fund/sites/default/files/document/241015-debt-climate-swaps-gcf-feasibility-study-updated.pdf

Chicago

Green Climate Fund. Debt for climate swaps: exploring avenues and opportunities. 2024. https://www.greenclimate.fund/sites/default/files/document/241015-debt-climate-swaps-gcf-feasibility-study-updated.pdf.

Wikipedia

{{cite report |author=Green Climate Fund |title=Debt for climate swaps: exploring avenues and opportunities |date=October 2024 |url=https://www.greenclimate.fund/sites/default/files/document/241015-debt-climate-swaps-gcf-feasibility-study-updated.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{greenclimatefund2024debt, author = {{Green Climate Fund}}, title = {{Debt for climate swaps: exploring avenues and opportunities}}, institution = {Green Climate Fund}, year = {2024}, month = oct, url = {https://www.greenclimate.fund/sites/default/files/document/241015-debt-climate-swaps-gcf-feasibility-study-updated.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }