Debt-for-nature exchanges demonstrated that debt exchanges can operate without the inherent weaknesses of debt-for-equity exchanges: they don't tend to be inflationary and can be run consistently for long periods. As a consequence debt-exchange mechanisms began to be applied to a wide range of developmental goals. Two prominent examples, debt-for-education and debt-for-health initiatives, are discussed in the following sections.

DEBT FOR EDUCATION

Some three years after the early debt-for-nature exchanges in 1987, it was realised that the promotion of education could replace nature conservancy as the purpose of the exchange. Debt-for-education exchanges are another application of the basic principle that the acquisition of debt and its tender to the debtor nation for discharge can, by virtue of the debt's secondary market discount, magnify the purchasing power of hard currency for local currency. Indeed, in the first debt-for-education exchange, Harvard University multiplied the purchasing power of its funding almost three times.

In 1990 Harvard University and Ecuador entered into a debt-for-education agreement. Pursuant to the agreement, Harvard acquired US$5 million of Ecuadorian debt in the secondary market and exchanged these loans with the Central Bank of Ecuador for 50% of their face value in local currency bonds. As Harvard acquired the loans at a price of 15.5% of face value, their total investment was US$775,000. The bonds were transferred to a local Ecuadorian educational foundation, formed for the purpose. This foundation sold the bonds in Ecuador and used the proceeds to purchase US dollars in the local market.