19. May 2023

Ecuador – Credit Suisse: a debt for nature swap is something different

The purchase of $1.63 billion in Ecuadorian debt on the secondary market by the major Swiss bank Credit Suisse (CS) received considerable media attention in early May. Due to the country’s critical economic situation, Ecuador’s government bonds, which mature between 2030 and 2040, were trading between 35.5 and 53.25 percent of their face value. Accordingly, Credit Suisse was able to buy the 1.63 billion for ultimately only $656 million. To finance the operation, CS floated a blue bond, which it financed through Ecuador’s ongoing debt service on the remaining claims in the same amount.

In addition, Ecuador committed to provide $18 million annually for the protection of the sensitive Galapagos archipelago. This additional commitment was a key selling point that allowed CS to sell its Blue Bond to conservation-minded investors.

The whole package was presented in the media as a Debt for Nature Swap – although it actually is not. That’s because a debt for nature swap – or, more generally, any exchange of debt for the provision of funds for development projects more broadly in the debtor country – actually involves the waiver of a creditor in return for the agreed developmental measures. For example, the German government, as well as the governments of Italy and Spain, use the instrument of debt conversion, and this is how the major debt conversion programs of the past have worked.

In the present case and some other recent cases, things are different: The original creditors receive what their claims are worth on a daily basis, thus voluntarily waiving nothing. An investor (in this case CS) becomes the holder of a claim on Ecuador that is completely risk-free, moreover, because of a credit guarantee issued by the (public) Inter-American Development Bank. And only the savings resulting from the fallen secondary market value – which Ecuador, if it had had the means, could have realized all on its own, even without CS – provide the scope for the desired investments in conservation.

That the attractive label of debt-for-nature can be appropriated by private investors in this way also has to do with the changing creditor profiles of critically indebted countries: a growing share, especially in middle-income countries like Ecuador, is accounted for by private bondholders. Unlike some philanthropic private creditors in the earlier phases of the global debt crisis, today’s investors are unwilling to waive claims beyond what they have already lost due to the fallen market price. The model described above now offers the opportunity to paint a people-friendly picture from an operation made up of one or several interlinked commercial sub-transactions, and to label it with the traditional Debt for Nature Swap label.

If investors were really concerned with massive investments in conservation, rather than a lucrative investment plus a bit of conservation on the side, they could also – as some public creditors do – waive their own claims altogether, and in return cooperate with civil society partners, International Financial Institutions and relevant donor governments in the country concerned to become genuine sponsors for conservation.

However, this would not be profitable in the strict sense. Socially and ecologically profitable, however.