Monday, January 15, 2018

Another Debt Crisis Looms

Global interest rates are rising. Poor countries are finding it tougher to pay back money borrowed from banks in anticipation of a commodity windfall that never materialised. Stir in some corruption that has seen funds stolen and what do you have? Another potential debt crisis.  The warning signs are there. The IMF and the World Bank both know it.
Africa needs more private-sector investment because debt relief and western aid have not been enough on their own to bring about economic modernisation. And in the years immediately after the 2008 financial crisis investing in Africa was attractive. Debt relief and better financial management meant African countries looked more stable. The money creation process known as quantitative easing meant western banks and other financial institutions were awash with funds. Ultra-low interest rates in the developed world meant investors were scouring the world for higher yields than they could obtain at home. Many African countries were also exporters of commodities that were in high demand due to China’s rapid growth. Deals were done in which western banks lent money for projects in African countries, with the debt to be paid off by the proceeds of rising commodity prices. That was the theory. In practice, very questionable an very dubious  deals were done.
 A prime example is the one made in London five years ago between Credit Suisse and Russia’s VTB bank to lend $2bn to two companies in Mozambique backed by the government in Maputo. The money was supposed to be for a tuna fishing fleet and for a navy to protect the boats operating in Mozambique’s territorial waters. Credit Suisse and VTB trousered $200m between them in fees, but the loans were never revealed to the Mozambique parliament, the IMF, the financial markets or the Mozambique people.  A report into the deal by the corporate investigations company Kroll concluded that the two companies were inadequately managed and had generated no meaningful revenue. At least a quarter of the money is unaccounted for, with some suspicion that it was spent on military equipment. 
Jamie Drummond, the director of the development campaign group One says that it is not clear the money ever turned up in Mozambique after being sent to two offshore companies in Abu Dhabi. For sure, though, not a single tuna has been landed. Mozambique has paid a heavy price for defaulting on the debt, which has been sold on to vulture funds. The IMF, miffed at being lied to, has suspended its programme and the loss of financial support has meant public services are being cut.  The tuna deal stank in every way. It was bad for Mozambique.
Mozambique is not the only country in difficulty. The Jubilee debt campaign said that at the end of 2017, 28 countries were rated as in debt distress or at high risk of debt distress, up from 22 at the end of 2016, and 15 in 2013. The number of countries classified as low risk has more than halved – from 24 in 2013 to 11 currently.

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