The News
Ecuador announced a record-setting deal on Tuesday designed to reduce its debt burden and free up hundreds of millions of dollars to fund marine conservation around the Galápagos Islands, an archipelago of unique biodiversity that’s famous for inspiring Darwin’s theory of evolution.
The arrangement, known as a debt-for-nature deal, is a bit like refinancing a mortgage, only for government bonds.
Gustavo Manrique Miranda, the Ecuadorean foreign minister, called it a historic agreement that takes into account the value of nature. He said Ecuador was as wealthy as any of the richest countries in the world, “but our currency is the biodiversity.”
How It Works: It’s a creative arrangement.
When countries need cash, they often sell bonds, which they repay over time with interest. But Ecuador is struggling with debt and political turmoil. Its bonds have lost so much value on the market that some investors, presumably fearing deeper losses, were willing to sell $1.6 billion worth to the bank Credit Suisse at an average of 40 cents on the dollar.
The bank then converted them into a $656 million Galápagos Marine Bond, which it used to finance a loan that will help Ecuador fund conservation. That makes the deal the biggest debt-for-nature swap in history.
The bank’s investors get “really enthusiastic” for opportunities that come with a positive impact on nature and society, said Ramzi Issa, who managed the transaction at Credit Suisse.
The restructuring means Ecuador will save more than $1 billion in future interest and principal payments. The old bondholders, for their part, avoid the risk of bigger losses.
The U.S. government’s development bank provided political risk insurance.
Why It Matters: The biodiversity crisis is getting worse.
Climate change isn’t the only environmental calamity. Scientists estimate that a million plants and animals are at risk of extinction as humans plow and pave over land, overfish the seas and overheat the planet.
As ecosystems break down, so does nature’s ability to provide the water and food humans, and the rest of life on Earth, rely on.
In December, nations agreed to take measures to stop biodiversity loss. But that action requires money. And the world’s most biodiverse countries tend to be in the Global South, still suffering from legacies of colonialism and often reeling from debt.
“Countries in heavy debt or at risk of debt default do not have the means to prioritize environmental protection, and may be unattractive to investors due to poor credit ratings,” said Alice Hughes, a professor of conservation biology at Hong Kong University who has studied debt-for-nature deals. Such swaps “provide the means to overcome these issues.”
The December agreement calls for countries to protect 30 percent of the world’s land and water by 2030. For oceans, that means not only creating marine protected areas, but managing, monitoring and enforcing them. Despite having certain protections for years, the Galápagos are at risk from illegal fishing, climate change and unsustainable tourism.
As part of the debt-for-nature deal, Ecuador has committed to spending more than $323 million over about 18 years on conservation in the Galápagos region, particularly to manage and monitor the Hermandad Marine Reserve, a newer protected area the government announced in 2021. Money from the transaction will also help create an endowment intended to fund such activities in perpetuity.
“Success hinges on securing the financial resources that are needed to achieve effective ocean protection,” said Giuseppe Di Carlo, director of the Pew Bertarelli Ocean Legacy Project, which helped arrange the Galápagos deal. “We believe the financial sector can play a very important role.”
Background: The idea is gaining momentum.
The deal came at a turbulent time for both Ecuador and Credit Suisse.
Ecuador’s Congress is gearing up for a vote on whether to impeach the president, Guillermo Lasso, on corruption allegations. Credit Suisse is in the middle of a takeover by its former rival, UBS.
The ability to land the deal against that backdrop is evidence that debt-for-nature swaps are increasingly recognized as all-around wins that will survive changes in leadership, according to Oscar Soria, who focuses on biodiversity and climate policy for the advocacy group Avaaz.
Mr. Soria, who was not involved in the transaction, called it “very promising” and noted that more are in the works.
Debt-for-nature swaps have been around since the 1980s, but they appear to have new momentum. Recently, such deals have created marine protected areas or funded other conservation measures in waters off Belize, Barbados and Seychelles.
But such agreements have downsides, said Patrick Bigger, a research policy analyst at the University of California, Berkeley, and research director at Climate and Community Project, a think tank.
For instance, despite its record scope, the debt relief in the Galápagos transaction represents a tiny fraction of Ecuador’s debt, which stands at more than $60 billion, Dr. Bigger said.
Moreover, “interest is still flowing from poorer countries suffering the worst impacts of climate change, to which they made a relatively small contribution, to rich countries and banks that bear the vast majority of responsibility for the ecological crisis.”
