#64 1987 · Conservation International / Government of Bolivia · Conservation / international finance
A year-old nonprofit bought $650,000 of Bolivia's bad debt for pennies on the dollar, and forgave it for 4 million acres of rainforest instead of cash
the problem
Conservation groups can't outbid industry for land, and indebted governments can't afford to protect it
background
By the mid-1980s, Latin American governments including Bolivia's were sitting on foreign debt that had become effectively unpayable and, as a result, traded on secondary markets at a steep discount to face value — a bank or investor could buy a dollar of Bolivian government debt for a few cents, because almost nobody expected full repayment anyway. Environmental groups watching Amazonian rainforest disappear had the opposite problem: they had far too little cash to buy or lease land at market rates to protect it, and outright land purchase in a foreign country raised its own political complications.
Thomas Lovejoy, then at the World Wildlife Fund, proposed in 1984 that these two mismatches could cancel out: use hard currency to buy a developing country's discounted debt, then cancel that debt in exchange for a conservation commitment paid in land the government already controlled, not cash it didn't have. Conservation International, founded only months earlier and with no track record, decided to be the first to actually do it.
what everyone would do
The standard conservation approach was to raise cash donations and use them to buy or lease land directly at market rates, or to lobby a government for a grant of protected land through aid — both were bottlenecked by how little cash a conservation nonprofit could ever raise relative to the cost of large tracts of rainforest, and neither had anything to do with the fact that the government controlling that land was independently struggling with unpayable foreign debt.
what they saw
Lovejoy and Conservation International saw that Bolivia's debt crisis and the rainforest's vulnerability were the same underlying problem viewed from two sides: the debt was worth almost nothing to a market that already assumed it wouldn't be repaid in full, while land protection was something Bolivia's government could grant relatively cheaply, since it already controlled the territory, but had no separate incentive to prioritize. Buying the mispriced debt let a small nonprofit offer the government something it genuinely valued — real debt relief — using leverage created by a discount the market had already applied, instead of trying to outbid anyone for land with cash it didn't have.
the move
In 1987 Conservation International purchased US$650,000 of Bolivia's foreign debt on the secondary market at a steep discount, then forgave that debt back to the Bolivian government in exchange for its commitment to establish and protect roughly 1.6 million hectares (about 4 million acres) of Amazonian buffer zones around the existing Beni Biosphere Reserve — converting a debt instrument that was nearly worthless to a lender into land protection that would have cost far more to buy directly.
why it works
Bolivia's foreign debt traded at a steep discount on secondary markets because lenders had already priced in the near-certainty of partial or no repayment, so Conservation International's $650,000 bought debt worth far more at face value. Forgiving that debt back to Bolivia in exchange for a land-protection commitment gave the government real, valuable relief from an obligation it was struggling to service, while costing Bolivia comparatively little to grant, since setting aside land it already controlled required no cash it didn't have, only forgone alternative use. Because the market's own discount is what created the leverage, a modest amount of hard currency converted into forgiveness of a much larger face-value debt, making the conservation outcome secured disproportionate to the cash actually spent.
the payoff
The Bolivia swap became the first debt-for-nature agreement in the world; in the years since, more than 140 similar swaps have been struck between conservation organizations or creditor nations and debtor governments across the developing world, freeing up billions of dollars' worth of conservation commitments that direct cash purchases or grants alone could not have funded.
where it breaks
The mechanism requires a distressed debtor whose obligations trade at a steep enough discount to create real leverage — debt trading near its face value offers no such advantage, since buying it costs almost as much as the relief it buys. It also requires the debtor to control an asset the buyer values, like land, that can be granted relatively cheaply against the debt forgiven, and it requires enough political stability and rule of law in the debtor country that a conservation commitment, once made, is actually honored over time rather than quietly reversed once the debt relief has already been banked. And it depends on a secondary market existing for the debt at all — obligations that can't be traded or discounted, such as private bilateral loans held to maturity with no resale market, offer no mispricing to exploit in the first place.
what came after
Conservation International credits the deal with opening what one of its Bolivia country directors calls 'permission to think about financing conservation in a bigger way' — debt-for-nature swaps are now a recognized instrument used by the World Bank, national governments and NGOs, including contemporary multi-hundred-million-dollar swaps that dwarf the original $650,000 transaction in size while using the same underlying mechanism.
references
- [1]How one South American country became a lab for conservationConservation International, 2023conservation.org
- [2]Debt-for-nature swapWikipedia, 2024en.wikipedia.org
- [3]Debt-for-nature swaps: a decade of experience and new directions for the futureUN Food and Agriculture Organization (Unasylva), 1997fao.org