REFUSE TO RENEGOTIATE DEBT

Some of Mozambique’s creditors, far from accepting the government’s offer to renegotiate unpayable debts, are claiming that the government played foul when it defaulted on an interest payment of almost 60 million US dollars last week.The complaints come from creditors who purchased bonds initially issued by the Mozambique Tuna Company (Ematum) in 2013. The bonds were for 850 million US dollars, and were issued via European banks, notably Credit Suisse and VTB of Russia. The bonds were snapped up by investors who asked no questions about the ability of Ematum, a new and untested company, to repay. The bonds came with a Mozambican government guarantee, and nobody asked whether this guarantee was valid. 

In fact, if Credit Suisse and VTB had done any due diligence they would have discovered at once that the government guarantee was illegal. A parliamentary commission of inquiry, which reported last November, pointed out that the guarantee violated the budget laws (of 2013 and 2014), and the Mozambican Constitution (which says that it is the exclusive power of the country’s parliament, the Assembly of the Republic, to authorize the government “to contract or grant loans, to make other credit operations, and to establish the ceiling for state guarantees”.)The original repayment terms on the bonds were extremely tough – the money was 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 per cent. 

It was soon clear that Ematum was quite incapable of repaying anything, and so the burden fell on the government. The Ematum bonds were converted into sovereign government bonds with a longer repayment time, but at a higher interest rate, under a deal reached with bondholders in April 2016. What remained of the Ematum bonds were swapped for government bonds maturing in 2023. The interest rate, however, shot up to 10.5 per cent.But Ematum was just one of three quasi-state companies which, on the basis of illicit government guarantees, had borrowed huge sums of money, mostly from Credit Suisse and VTB. The previous Mozambican government, headed by President Armando Guebuza, had kept the other loans, to the security-related companies Proindicus and MAM, secret, and they amounted to over 1.1 billion dollars. None of the companies was making any profits, and the state had no money to make the payments on schedule.The government alerted the creditors to the country’s financial situation in October, and urged them to renegotiate.

But apparently the bondholders did not believe the government. Cited by the Bloomberg news service, Charles Blitzer, a Washington-based consultant who is advising the majority of the bondholders, insisted, against all the evidence, that the government can pay.
“The non-payment of Wednesday was a strategic default and was not driven by the inability to make the payment,” said Blitzer. “This strategy we think is not conducive to moving forward, not just with us but more broadly. It’s not conducive to restoring confidence from future lenders and investors.”The International Monetary Fund (IMF) disagrees with Blitzer. The IMF resident representative in Maputo, Ari Aisen, pointed out last Thursday that there was nothing surprising about the default on the interest payment. “The government’s position seems to be consistent from the start, when the Minister Economy and Finance Minister Adriano Maleiane) went to London and indicated the fiscal difficulties the country is facing”, he said. “So it seems natural that Mozambique has not been able to make this payment”.

At the London meeting with creditors on 25 October, Maleiane had indicated in great detail the financial crisis facing the country, and why it will be impossible to pay anything to the Ematum, Proindicus and MAM creditors at any time in 2017.But instead of working on a renegotiation, the bondholders have dug their heels in and insisted on payment. Blitzer did tell Bloomberg that the bondholders would be willing to hold “preliminary talks”, if the government approaches them. But the government has appointed advisers to deal with the creditors. They are the London law firm White and Case and the financial advisory and asset management firm, Lazard Freres.In a statement issued a week ago, the Ministry of Economy and Finance urged the bondholders to liaise with Lazard Freres and White and Case to establish “a constructive and collaborative dialogue”. According to the Bloomberg report, the bondholders will not talk about debt restructuring until the independent audit of Ematum, Proindicus and MAM is published, and until Mozambique reaches a new programme with the IMF.But the IMF has already made it clear that no new programme is possible until Mozambique brings its debt down to sustainable levels, and that will only be possible through debt restructuring.Hence the longer the creditors refuse to talk about restructuring, the longer they will have to wait to receive any payment at all.Meanwhile pressure is building up from Mozambican civil society, backed up by supporters abroad, to declare the three loans as null and void, because of the illegality of the government guarantees.