INTRODUCTION

The beginning was the early 1980s. And in the beginning were bad loans, and from the loins of these bad loans sprang debt–equity exchanges, which quickly begat debt-for-nature exchanges, and then debt-for-education exchanges, and most recently, debt-for-health exchanges. And today, when all the begatting has been done, the progeny are known mostly as debt-for-development exchanges, or sometimes as debt-for-investment projects (by those who wish to suggest for the technique a more commercial focus).

The first debt-for-development exchange was undertaken in 1987. Two decades later, in 2007, it was estimated that these financial techniques had resulted in the cancellation of US$5.7 billion of debt and the application of US$3.6 billion to development projects. Early debt-for-development exchanges typically involved an environmental or other nongovernmental organisation (NGO), which purchased the debt for a discount in the secondary market and tendered it to the debtor government in return for a promise to apply an agreed-upon amount of local currency to mutually agreed-upon environmental or other projects in the debtor nation. The most common type of debt-for-development exchange today takes place directly between a creditor and debtor nation without NGO involvement. Under a typical exchange, the creditor nation will offer to cancel a specified part of a loan or loans if the debtor nation applies a portion of the amount cancelled (or perhaps the repayments it would have made on the loan over the next 5 to 10 years) towards mutually determined development projects in the debtor nation.