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Ecuador announced a record-breaking deal on Tuesday aimed at reducing its debt burden and freeing up hundreds of millions of dollars in marine conservation funding around the Galapagos Islands, an archipelago of unique biodiversity famous for inspiring Darwin’s theory of evolution.
This arrangement, known as a debt-for-nature deal, is a bit like a mortgage refinance, only for government bonds.
Ecuadorian Foreign Minister Gustavo Manrique Miranda described it as a landmark agreement that takes into account the value of nature. Ecuador was as rich as any of the richest countries in the world, he said, “but our currency is biodiversity.”
How it works: It’s a creative arrangement.
When countries need liquidity, they often sell bonds, which they pay back over time with interest. But Ecuador suffers from debt and political turmoil. Its bonds lost so much market value that some investors, presumably fearing deeper losses, were willing to sell $1.6 billion worth of credit to Credit Suisse at an average of 40 cents on the dollar.
The bank then funneled it into $656 million from the Galápagos Marine Bond, which it used to fund a loan that would help Ecuador fund conservation. This makes the deal the largest debt-for-nature swap in history.
Ramzi Issa, who managed the deal at Credit Suisse, said the bank’s investors are “really excited” about the opportunities that have a positive impact on nature and society.
The restructuring means that Ecuador will save more than $1 billion in interest and future principal payments. Longtime bondholders, for their part, avoid the risk of incurring larger losses.
Presented by the US Government Development Bank Political risk insurance.
why does it matter: The biodiversity crisis is getting worse.
Climate change is not the only environmental disaster. Scientists estimate that a million plants and animals are at risk of extinction because humans plow and level the land, overfill the sea and warm the planet.
As ecosystems collapse, so does nature’s ability to provide the water and food that humans, and the rest of life on Earth, depend on.
In December, countries agreed to take measures to halt biodiversity loss. But this business requires money. The most biologically diverse countries tend to be in the global south, still suffering from the legacy of colonialism and often suffering from debt.
said Alice Hughes, a professor of conservation biology at the University of Hong Kong who has studied debt-versus-nature deals. Such trade-offs “provide the means to overcome these issues.”
The December agreement calls for countries to protect 30 percent of the world’s land and waters by 2030. For oceans, this means not only creating marine protected areas, but also managing, monitoring and enforcing them. Despite having had some protection for years, the Galapagos Islands are at risk from illegal fishing, climate change and unsustainable tourism.
As part of its debt-for-nature deal, Ecuador has committed to spending more than $323 million over about 18 years on conservation in the Galapagos region, particularly to manage and monitor the Hermandad Marine Reserve, a new protected area announced by the government in 2021 – the money from the deal will help also in creating an endowment intended to fund such activities in perpetuity.
“Success hinges on securing the financial resources needed to achieve effective protection of the oceans,” said Giuseppe De Carlo, director of the Pew Bertarelli Ocean Legacy Project, which helped arrange the Galapagos deal. “We believe the financial sector can play a very important role.”
background: the idea is gaining momentum.
The agreement came at a turbulent time for both Ecuador and Credit Suisse.
Ecuador’s Congress is preparing to vote to impeach the President, Guillermo Lasso, over allegations of corruption. Credit Suisse is in the middle of a takeover by former rival UBS.
The ability to get the deal done against this backdrop is evidence that debt-for-nature swaps are increasingly being recognized as sweeping wins that will withstand changes in leadership, according to Oscar Surya, who focuses on biodiversity and climate policy for advocacy group Avaaz. .
Mr. Surya, who was not involved in the deal, called it “very promising” and noted that more work was in the works.
Debt-for-nature swaps have been around since the 1980s, but they seem to be enjoying new momentum. More recently, these deals have created marine protected areas or funded other conservation measures in the waters off Belize, Barbados, and the Seychelles.
Such agreements have downsides, said Patrick Bigger, a research policy analyst at the University of California, Berkeley, and director of research at the Claim and Community Project, a think-tank.
For example, despite its record scale, the debt relief in the Galapagos deal represents a small fraction of Ecuador’s debt, which amounts to more than $60 billion, Dr. Biger said.
Moreover, “the benefit continues to flow from the poor countries suffering the worst effects of climate change, to which they have made a relatively small contribution, to the rich countries and banks that bear the vast majority of responsibility for the environmental crisis.”
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