Debt-for-development swaps are often discussed as if they are a distinct species of financial instruments. In fact, in most cases, the underlying structure is made up of familiar capital markets techniques.
At its simplest, a debt-for-development swap is a transaction in which a sovereign refinances debt and commits part of the resulting saving to a specified environmental or development objective. The old debt may be bought back through a tender offer funded by new debt or directly exchanged into new debt. The new debt is often made cheaper by third-party credit enhancement, from a multilateral development institution or insurer.
Decisions for sovereign funding…