Most secret debt illegal, say bondholders

Most secret debt illegal, say bondholders

“Mozambique is clearly not in medium-term debt distress. Rather, Mozambique has a short-term problem caused by its refusal – thus far – to follow the ruling of Mozambique’s Administrative Tribunal and the evidence from the Kroll report, which would warrant the government disavowing the remaining $1.2 billion in illegal guarantees on the MAM and Proindicus liabilities,” argue the Ematum bondholders in a 25 October statement. “Disavowal of those purported guarantees and the liquidation of the insolvent MAM, Proindicus and Ematum entities is the appropriate restructuring that would accelerate Mozambique’s economic recovery.”

The bondholders are arguing that all of the original $2 bn secret debt was illegal. But the $800 mn Ematum bonds were then nationalised by the government, and made legal. So the bondholders should be paid, but not the other $1.2 bn in creditors who participated in MAM and ProIndicus syndicated loans. https://drive.google.com/file/d/0B3O1hc0SqbmiZUlHUGNVV1AyZ3M/view

Debt Comments:
1. No one wants to talk now

The bondholder statement also contains a lot of nonsense – that the government must pay in full, that the government has stabilised the economy and should use growing reserves to pay, and that bondholders will not sit at the same negotiating table as the syndicated loan holders. All of that is a way of saying that the bondholders do not really want to talk now. Vulture funds have been buying Mozambique bonds with the intention of holding them for several years.

Indeed, it now looks like the three main parties all want to wait for at least three years until there is a new government and the gas is closer to production and Mozambique has some hope of paying. The three sides are the ex-Ematum bondholders, Credit Suisse and the holders of syndicated loans to MAM and ProInducus, and the government.

Government has no money to pay and will not for the next three years, so it simply will not pay and sees no reason to talk to creditors. Bondholders think they will get more money later when the gas comes on stream, and can keep the government bonds in their portfolio until then.

With respect to Credit Suisse and the syndicated loan holders, the position is more complex. So long as Mozambique simply does not pay, it would be up to the lenders to go to court against the government, and any legal action would be in an English court. The court would take into account Credit Suisse’s obvious misconduct in the loans, and the decision in the English High Court on 29 March on Ukraine debt means the court will also have to take into account Mozambique’s constitution and that fact that government has never acknowledged the secret debt. (see this newsletter 372, 2 June). Thus the creditors seem unlikely to sue because they could easily lose.

Credit Suisse is not going to rush any legal action or negotiations. Tidjane Thiam only recently became CEO of the bank and he is trying to clean up some of the worst problems. In three years he will be able to say that problems with Mozambique took place under an old poorly run administration and his bank is now clean and has no responsibility for what happened nearly a decade earlier.

So no one has any interest in talking about the $2 bn secret debt now. Perhaps in 2020.  jh

2. Bondholders back state not paying

Bondholders’ use of the word “disavow” is important, because it means to deny responsibility – it is very different than defaulting. Of course this is in the interest of the bondholders – pay us and not the others, they say. But this is actually very important support for Mozambique. The bondholders represent major global bond traders and investment funds, such as Franklin Templeton, and for them to say the syndicated loans are illegal adds major weight to those who say Mozambique should not pay. jh

3. Finding ways to give $ to government

To support water supply in Maputo, Netherlands on 30 October gave $2 mn to FIPAG (Fundo de Investimento e Patrimonio do Abastecimento de Agua; Water Supply Investment Fund), which describes itself as “a public institution with administrative autonomy under the Ministry of Public Works, Housing, and Water Resources.”

We raised this with the Dutch, who explained that Netherlands has not given budget support since 2013, but that after the disclosure of the hidden debts, the Minister for Trade and Development – in line with the GBS donors – decided to suspend all Dutch aid to central government channelled through the Treasury. Netherlands suspended contributions to the common funds in health and water. But Dutch support to FIPAG does not fit into this category because the funds are earmarked to specific activities and specific requirements apply for reporting; disbursements are made through a separate bank account, not through the Treasury.

INAS (Instituto Nacional de Accao Social; National Social Action Institute) has similar administrative autonomy under the Ministry of Gender, Children and Social Action. Donors have been looking for ways to support social protection and cash transfers and to use money that had been planned for budget support. (See our recent social protection special report, http://bit.ly/MozSocPro)

Some donors treat INAS as a central government fund. But if the Dutch can find a way to treat FIPAG differently, surely the EU and other donors could find a way to channel money through INAS to support the extension of basic grants for children and the elderly.    jh

Electricity problems if debt crisis continues

“If the debt situation continues for the next two or three years, we will be affected,” said Carlos Yum, operations manager of EDM (Electricidade de Mocambique, Mozambique Electricity). EDM needs to borrow more than $600 mn for “urgent” and “critical” investment; if that is not available, infrastructure could collapse, he said. (O Pais Economico 3 Nov)

EDM accounts show the company lost MT 900 mn ($15 mn), partly due to low energy prices which had been forced by previous president Armando Guebuza. But Yum also pointed to the economic crisis which caused shops and restaurants to close and caused a general fall in electricity consumption in 2015 and 2016.

The accounts also show that personal costs and salaries rose MT 700 mn ($12 mn) in 2016. EDM’s administrative council, which includes Yum, has salaries only 30% paid in Meticais and the rest in US dollars. Thus the dramatic 2016 devaluation forced an increase in Meticais costs. There are six members of the administrative council, and O Pais (3 Nov) estimates their salaries at MT 1.2 mn ($20,000) per month each. Eleven former council members also receive payments.

Editor: Joseph Hanlon