How Eurobonds are enriching the corrupt in African states

What you need to know:

  • The irony of it all is that when you are not able to repay the syndicated borrowing four years later, the same European banks will promptly be in town to help you substitute the loans for Eurobonds. It is a vicious cycle, a big conspiracy.
  • In Mozambique, we have learnt that the proceeds of some of these loans can be used by the corrupt to fund purposes other than what is stated in the prospectus.
  • Nobel laureate Joseph Stiglitz attributes the Eurobond borrowing craze in Africa to “short-sighted financial markets, working with short-sighted governments, laying the ground work for the world’s next debt crisis”.

If you have been closely following the shenanigans and controversies around the Eurobond borrowing spree currently gathering pace in Africa, you will be intrigued by recent developments in Mozambique.

Indeed, the case of Mozambique offers new and rare insights into how commercial loans and Eurobond borrowings have opened up wide loopholes that the rent-seeking African elite is exploiting to make big bucks.

Whether you are talking about Tanzania, Kenya, or Mozambique, the trends is all too familiar.

First, three or four European banks will approach you with a proposition to arrange or underwrite for you a multi-million dollar loan typically of the tenure of two to three years.

Three years later, when the syndicated loan comes due, the African country will not have the money to repay it. Invariably, the same European banks will then come back to you, offering to arrange for you a Eurobond that will typically be listed on the Irish Stock Exchange. This is how you get the money to pay off the syndicated loan.

Clearly, the Eurobond borrowing spree has spawned shadowy groups and networks bent on taking advantage of yield-hungry European banks and fund managers and are hopping from one African country to the another, where they collude with corrupt officials to saddle citizens with expensive dollar loans which are, in most cases, used to fund opaque security contracts padded with huge kickbacks and backhanders.

These people act as if they are oblivious to what economists call asset mismatches — the fact that in most cases these loans have to be repaid from local currency tax revenues.

These European banks are merely engaged in a selfish search for fat fees and commissions.

The irony of it all is that when you are not able to repay the syndicated borrowing four years later, the same European banks will promptly be in town to help you substitute the loans for Eurobonds. It is a vicious cycle, a big conspiracy.

In Mozambique, we have learnt that the proceeds of some of these loans can be used by the corrupt to fund purposes other than what is stated in the prospectus.

We have also learnt that syndicated loans and Eurobond borrowings is what corrupt African governments use to fund secret security contracts.

In Mozambique, money borrowed to fund infrastructure for fish development was diverted into purchasing navy ships, armaments, and patrol boats.

Still, the most explosive revelation in the story from Maputo is that even as Mozambique was borrowing the $850 million syndicated loan for fish development projects in 2013, the arrangers and underwriters — the Swiss bank Credit Suisse and Russia’s VTB Bank — were secretly placing bonds amounting to $1 billion without the knowledge of neither the public nor parliament.

The buyers were made to believe that the bond they were investing in was the same one that had been stated in the prospectus.

With repayment time coming up last year, the banks predictably came up with a scheme that would ostensibly make it possible for Mozambique to pay the fish borrowings.

Touted as loan restructuring, the idea was to convert the fish bond into a Eurobond listed on the Irish Stock Exchange.

That additional borrowing of $1 billion was to remain secret until April this year. Unfortunately, when credit agencies were brought into the picture, Credit Suisse and VTB bank had to reveal the list of the secret bond holders.

Worse, for the officials, these revelations came at a time when Maputo was in the middle of an IMF review under a standby arrangement.

Under pressure from the fund, the minister for Finance publicly admitted the existence of the secret loans.

Corrupt African governments love Eurobond borrowings because this is how they avoid the conditionalities and close monitoring associated with multi-laterals.

And, with hungry Europeans ready for a piece of the action, all Eurobond issues by African countries are invariably over-subscribed.

Nobel laureate Joseph Stiglitz attributes the Eurobond borrowing craze in Africa to “short-sighted financial markets, working with short-sighted governments, laying the ground work for the world’s next debt crisis”.