Debt-to-Sustainability Swaps (D2S): A Practical Framework

Published on: 10/07/24

By: Martin Kessler,  Charles Albinet, Hamouda Chekir,

A powerful instrument, for specific contexts


Amidst growing liquidity challenges and mounting debt burdens, governments have to forego some of their priorities, especially when they represent long-term commitments, such as sustainability investment. Debt-To-Sustainability Swaps (D2S) have become a popular tool to address this dual tension. Yet, their limitations are also well known: they are fit for purpose in a limited number of cases, and tend to be complex arrangements.

When are D2S useful? How much can they reduce debt? What are the conditions for a meaningful sustainability impact? This paper describes when and where swaps are useful, and goes beyond these considerations by proposing a practical guide on the economics, impact and governance of such transactions.

When are D2S useful?

First, the paper describes the circumstances in which D2S have the most significant impact. For countries emerging from sovereign debt restructuring, a bond buyback at discount can result in substantial fiscal savings, as illustrated by Ecuador’s transaction, which reduced its debt stock by $1 billion through a repurchase at 40 cents on the dollar, and crystallized savings of $1.5 billion in debt service.

Secondly, the paper emphasizes the relevance of D2S for countries with sizable refinancing needs, enabling proactive management of upcoming maturities and adjustments to their debt service profile.

In more distressed debt situations, however, debt swaps are no panacea. Their financial impact may not be sufficient to provide the necessary debt relief. The administrative costs of those complex transactions, which require considerable preparation and coordination within the government and across stakeholders should not be underestimated. Their structuring may become a distraction at a time when the administration is dealing with a crisis.

Graph 1


The paper examines four recent large D2S transactions in Ecuador, Gabon, Barbados, and Belize, and shows that the economics of swaps are not always the same whether the objective is to manage liquidity tensions and refinance specific maturities: or whether the goal is to reduce the stock of debt or its cost. Ecuador and Belize used the D2S to reduce debt stock, while Barbados used it to reduce interest costs, and Gabon to manage specific maturities. This distinction matters for several key aspects: debt profile, role of credit enhancement, and credit rating agencies' assessments.


When considering such a transaction, policymakers also need practical criteria to evaluate the relevance of D2S. It proposes an assessment framework to analyze the swaps’ performance along three core dimensions - Economics, Impact, and Governance (“E-I-G”). It also outlines a checklist for policymakers, willing to assess the relevance of launching a D2S or measuring the performance of a recent transaction.

table 2

Lessons and conclusions

Beyond this check-list for policy-makers, additional reforms could be contemplated to make D2S operations more efficient.

The providers of credit enhancement for D2S remain limited so far: only a handful of institutions have been active, and mainly on biodiversity issues. In this regard, a broader set of actors would diversify financial products and the set of sustainability themes beyond nature and climate, to education and health. Philanthropic funds could also provide guarantees and adapt them to their own objectives. Overall, we expect that, as the pool of investors interested in such transactions grows, the cost and liquidity of the debt instrument will improve.

Besides, the financial structure of D2S  could be harmonized and stream-lined. At the same time, ongoing policy efforts to enhance their impact and their governance will be decisive, although each D2S would need to be tailored to each project-specific context.

D2S are no solution to sovereign debt crises, but an important instrument to manage financial and sustainability risks, in specific contexts. As more operations emerge, lessons learned will allow for more efficiency and greater scale – towards sustainability.