China leads charge to promote sub-Saharan infrastructure
There is surprising support from lenders and donors for Mozambique to repudiate part of the secret debt. One important donor said “I would not like to see my money being used to repay these creditors.” But resistance to repudiation comes from senior Frelimo figures who would be required to admit that the loans were at least partly incompetent or corrupt
The $2 bn in secret loans were organised by Credit Suisse and the Russian state-owned bank VTB. Investors were sold bonds or pieces of the actual loans. Thus is it argued that Credit Suisse and VTB have a fiduciary duty to those buying the bonds and loan pieces to determine that what is being sold is as offered, and has a reasonable chance of being repaid. Similarly, in organising a loan to one of the poorest countries in the world, the banks had a responsibility to determine if the loans were for viable projects. Thus banks are expected to undertake what is called a “due diligence” assessment.
Due diligence would have shown that the loans were not government guaranteed, because that requires parliamentary approval – independent of claims from the Finance Minister. It would have shown that the prices of what was being purchased were inflated, and that the incomes being projected for the companies were not justified by the amount of tuna available, potential maritime traffic, and possible gas security contracts. Further, due diligence would have shown that the loans were larger than the purchases proposed, meaning money would go for purposes not listed – including military purchases and corruption, which is not permitted by many lenders and investors. Finally, part of due diligence is informal contact with the IMF, which apparently did not happen, and would have shown total Mozambican debt to be larger than that stated publicly.
The case against Credit Suisse and VTB is that either due diligence was not done, or it was ignored and not communicated either to Mozambican authorities or to buyers of the loans and bonds. Just as the vendor is responsible for the sale of an obviously false or unsafe product, so Credit Suisse and VTB are responsible for the sale of bonds and loans which would not have passed due diligence. Credit Suisse and VTB are also guilty of “loan pushing” – encouraging Mozambique to take on debts which they do not need and which are inappropriate. Together, this makes the loans “illegitimate”. The term “odious debt” is also sometimes used. The issue was debated extensively a decade ago, and has returned to international attention with Mozambique: http://jubileedebt.org.uk/
Rather than defaulting on the debt – that is, simply not repaying – Mozambique would have to repudiate the debt, saying it is illegitimate and should not be repaid. Perhaps surprisingly, these is strong support in private by donors and lenders for such an action by Mozambique. There is no precedent for such an action, but donors and lenders see the conduct of Credit Suisse and VTB as so egregious that they would encourage the action. And they expect the Kroll audit to show that the loans were grossly improper and that Credit Suisse and VTB failed to comply with their own rules.
The government and Frelimo seem unwilling to take such a position, however. Many in Frelimo believe, and government-aligned commentators have written, that the loans were good and reasonable. Even if not used entirely as initially claimed, the money was well spent to defend against Renamo, and to win the 2014 elections and support Frelimo. And the loans could have been repaid if gas prices had not fallen. This group argues that donors are hostile to Frelimo and supporting the opposition, and criticism of the loans and demands for an audit are just an attack on Frelimo.
The package of debt is complicated. There are three loans:
+ Ematum (tuna fishing), $850 mn in bonds organized by Credit Suisse and VTB in 2013, to be repaid over seven years, with a two year grace period, and at an interest rate of LIBOR (London Inter-Bank Offered Rate) plus 6.5%. (12 month US$ LIBOR is currently 1.6%) In April this year the Ematum bonds (down to $697 mn after the first repayments) were exchanged for government bonds for $585.5 million dollars that mature in 2023 (this is a “bullet bond”, with interest paid twice a year but capital is not repaid until 2023) but the interest rate went up to 10.5%.
+ Proindicus (maritime security), $622 mn in loans from Credit Suisse, broken up and sold on to investors. Interest only 3.75%. The payment schedule is $119.424 mn plus interest on 21 March every year up until 2021. The first, and so far only payment, was $24.88 mn of capital on 21 March 2016.
+ MAM (Mozambique Asset Management, ship repair), $535 mn in loans from VTB, broken up and sold on. Interest LIBOR plus 7%. Final maturity date is 23 May 2019. MAM should pay the principal in instalments of $133.75 mn on 23 May every year between 2016 and 2019, but MAM failed to pay this year.
It is argued that by renegotiating the loan and issuing government bonds, Mozambique has accepted liability for the Ematum loan. But it might still be possible to repudiate the Proindicus and MAM loans. It would be for a UK court to decide if the declaration of a Ministry of Finance should be taken at face value, even if due diligence would show he could not give a loan guarantee.
In its statement to creditors in October, the Ministry made clear that its was the secret loans which have destroyed Mozambique’s ability to pay. Debt service for 2017 is projected at $804 mn, of which $591 mn is Ematum, Proindicus and MAM. The Ministry of Economy and Finance made clear that no debt service payments were possible and called on creditors “to engage urgently with its financial and legal advisors, based on the principles of transparency, good faith and inter-creditor equity”. These advisers are the French company Lazard Freres and the international law firm White and Case.
By Joseph HanlonSource: News Reports & Clippings
Rising levels in major Mozambique river basins
Mozambique dollar bonds fall