• More countries are linking the cost of debt to conservation goals
  • Seychelles, Belize and Barbados among those striking deals
  • Ecuador swap could be largest yet at $800m
  • Cape Verde, Sri Lanka and others are also exploring offers

SHARM EL-SHEIKH, Egypt, Nov 17 (Reuters) – The Galapagos Islands, whose thousands of unique species inspired Darwin’s theory of evolution, are of incalculable ecological value. But what are they worth?

Possibly around $800 million, judging by the size of a ‘debt-for-nature’ swap deal that could reduce Ecuador’s debts in exchange for protecting the fragile ecosystem of its offshore territory , according to people familiar with the talks.

These kinds of deals are part of efforts to resolve an intractable dilemma facing world leaders at the ongoing UN COP27 summit in Egypt: who will foot the bill for the global fight against biodiversity loss and climate change? climate?

“There is now strong pressure to bring nature into sovereign debt markets,” said Simon Zadek, executive director of NatureFinance, which advises governments on debt-for-nature swaps and other types of finance focused on nature. on the climate.

“The tragedy of over-indebtedness offers a real opportunity,” he added, pointing to the nature-rich countries that appear to be ideal candidates for the debt swap after sharp declines in their bond prices this year.

Ecuador is not among the richest nations in the world. It’s a serial defaulter and its sovereign bonds are trading again at “distressed” levels, or a deep discount to face value. But it has a rich biodiversity that it could exploit in a wider region where much of the wildlife has been wiped out.

The country is in talks with banks and a nonprofit group in a bid to reach a deal that would see about $800 million of its debt refinanced at a lower cost, freeing up savings for conservation efforts, according to the three people familiar with the deal, who declined to be named because the discussions are confidential.

At this level, it would be the largest debt-for-nature swap to date. Still, it could possibly be eclipsed by others, including Sri Lanka, which has discussed a deal of up to $1 billion according to people familiar with the talks.

Cape Verde, an archipelago off West Africa, is meanwhile close to a nature swap that could be worth up to $200 million, said Jean-Paul Adam, a former civil servant. from the government of Seychelles who now works for the United Nations Economic Commission for Africa (UNECA). , providing funding advice to governments.

The Ecuadorian, Sri Lankan and Cape Verdean governments did not respond to requests for comment on this story, although Ecuadorian President Guillermo Lasso said in a local newspaper on October 12 that his Galapagos swap deal could be completed in four or five weeks.

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The potential transactions for Ecuador, Sri Lanka and Cape Verde, reported here in detail for the first time, indicate a renewed interest in this form of financial alchemy, which was conceived decades ago but remained a niche until recently.

Only three of some 140 swaps entered into over the past 35 years – the first in 1987 – were worth more than a quarter of a billion dollars, according to global data published by the African Development Bank. The average size was $26.6 million.

The combined value of swap deals to date is $3.7 billion, according to the data. That’s a fraction of the $400 billion that Emerging Markets sovereign debt analysts at Capital Economics recently estimated has fallen to distress levels.

Proponents say these current debt problems, combined with growing political will and recent successful swap deals in Seychelles, Belize and Barbados, mean a slew of other countries are now exploring the model.

Indeed, UNECA’s Adam said four African countries are now exploring potential exchanges. He declined to name them, saying he wasn’t sure they were ready for public release.

Patricia Scotland, secretary general of the 56-nation Commonwealth, told Reuters: “A lot of my members are looking at it and we are looking at it with them.”

The ecological stakes could hardly be higher.

Global populations of mammals, birds, fish, reptiles and amphibians have declined by nearly 70% on average since 1970, while Latin America has seen declines of more than 90%, according to the this year’s Living Planet Index compiled by the Global Fund. For Nature (WWF) and the Zoological Society of London.

Global biodiversity loss


These exchanges are often compromises.

If a country defaults, its bondholders lose money or at least have to wait much longer to get it back.

Debt-nature agreements can help because they can produce so-called green or blue bonds in the case of those that focus on ocean conservation, which are attracting a rapidly growing number of investors who want to achieve ESG and net-zero goals.

Veteran debt crisis fund manager Carl Ross at GMO said Belize’s commitment to protecting its sprawling barrier reef – the largest in the Western Hemisphere – had helped push its restructuring “in over the hump” last year as part of a deal he was involved in.

In their simplest form, these transactions see expensive bonds or loans canceled and replaced with cheaper financing, usually with the help of a credit guarantee from a multilateral development bank.

Ecuador, for example, is in talks with the Pew Charitable Trusts as well as the Inter-American Development Bank and the US International Development Finance Corporation, said two of the people familiar with the planned deal.

Pew and Banks declined to comment.

Obtaining buy-in from development banks is usually critical to the economics of a deal. But because banks must closely monitor their capital and credit rating to preserve their ability to borrow cheaply, this hurdle has long limited the growth of swaps.

World Bank Chief Operating Officer Axel van Trotsenburg told Reuters on the sidelines of COP27 that it supports debt-for-nature swaps, as did African Development Bank President Akinwumi Adesina, who said that his bank would “absolutely” start providing credit guarantees. .

G7 governments and Barbados Prime Minister Mia Mottley’s “Bridgetown Initiative” have all demanded that the World Bank and International Monetary Fund increase climate finance.

IMF chief Kristalina Georgieva spoke at COP27, saying swaps were an interesting part of the toolkit, although not a “silver bullet” in efforts to fund conservation.


Indeed, debt-for-nature agreements are dwarfed by the magnitude of the financing challenge: developing countries will need to secure $1 trillion a year in external finance by the end of the decade to take effective and restore nature, according to a report published at said COP27.

Nonetheless, those involved in such exchanges say they are having an impact.

Belize’s $553 million swap last year provided money to protect the world’s second-largest coral reef and reduced its debt levels by more than 10% of GDP, the government estimates.

Seychelles’ 2015 agreement, which created the world’s first blue bond after eight years of talks, saw the government commit to protecting 30% of its waters – an area the size of Germany – against overfishing and development and redeemed $22 million of its debt. on favorable terms, said former environment minister Ronny Jumeau.

Proponents of the exchange are pushing for the dozen major development banks to come together with expanded and standardized support to foster widespread use of the instruments.

“That’s the limiting factor that’s stopping us from just going to trillions of dollars,” added Kevin Bender of The Nature Conservancy, who leads the NGO’s sovereign debt teams and worked on the Belize exchange.

Esteban Brenes, US director of conservation funding for WWF, said improvements were also needed in the way wildlife pledges are monitored and verified so that creditors are confident countries are meeting their pledges.

Monitoring can be creative.

WWF has projects in Central and South America where they monitor deforestation by tracking jaguars, said Brenes, who has worked on debt-for-nature swaps for the past 25 years.

Big cats need about 50 square kilometers of good forest to hunt and breed, so they are a good indicator of forest health. More data showing the work of swaps should encourage international institutions to get involved, Brenes added.

“No planet, no business – that’s what we need the IMFs of this world to understand,” he said.

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Reporting by Simon Jessop in Sharm el-Sheikh, Clare Baldwin in Hong Kong and Marc Jones in London; Additional reporting by Uditha Jayasinghe in Colombo, Sergio Goncalves in Lisbon and Alexandra Valencia in Quito; Graphics by Sumanta Sen; Editing by Katy Daigle and Pravin Char

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