New financial instruments — including the retooling of debt-swap mechanisms similar to ones recently deployed for Caribbean sovereigns Belize and Barbados — must urgently be developed to address growing climate catastrophe risks across the region, according to the head of the Caribbean Development Bank (CDB).
Lenders should consider deals that contain contingency clauses related to catastrophic climate events, CDB President Hyginus “Gene” Leon told LatinFinance in an interview. Loans would embed a pre-catastrophe event structure that would allow debt to be swapped in the event of a disaster, thereby increasing resources available for rebuilding to better withstand future events.
“This would take debt payment pauses to a different level,” Leon said.
He said that contingent debt clauses linked to disasters are helpful but often fail to take into account the distinct phases that follow climate catastrophes — rescue, recovery and recuperation — and tend to be one-size-fits-all. He said the correct approach needs to distinguish between these phases.
What is really needed is “tailored-made conditionality linked to the context of the country, the kind of event, the intensity of the event and the capacity to recover and return to growth,” Leon said.
Debt swaps could be structured in a kind of ex-ante format for disasters, but it would require rejigging the mechanism, he said.
In September 2022, Barbados completed a $150 million debt-for-nature swap that created long-term sustainable financing for marine conservation and secured a sovereign commitment to marine conservation.
And in November last year, Belize restructured $553 million in outstanding bonds through a financing arrangement with US-based The Nature Conservancy (TNC) and pledged to protect 30% of its ocean, enforce regulations for fisheries and draft a framework for blue carbon projects.
STAYING ALIVE
“Risk exists and is the driver of everything and in the context of climate change, the risk that exists is that we are not going to meet the ‘1.5 degrees to stay alive’ mantra. The question, then, is what do we need to do with risk?” Leon said.
His comments came as development financiers pledged last week to implement new financing instruments that will not only help Caribbean countries prepare for climate change but also deal with losses when they occur.
Rémy Rioux, CEO of the French Development Agency (AFD), told reporters that development banks needed to double down on existing mechanisms and come up with new strategies that “consider loss and damage, addition to adaptation and mitigation.”
Rioux’s comments echoed the final communiqué issued at a development banking summit last week which called for greater use of contingent debt clauses linked to disasters, parametric contingent financing and credit lines, and innovative risk-transfer solutions.
The Finance in Common Summit (FiCS) development banking summit in Cartagena, Colombia brought together several hundred officials from public development banks worldwide.