Signs of default stress are already showing. In March 2009 — less than two years after the issue — Congolese bonds were trading for 20 cents on the dollar, pushing the yield to a record high. In January 2011, Ivory Coast became the first country to default on its sovereign debt since Jamaica in January 2010.
In June last year, Gabon delayed the coupon payment on its US$1 billion bond, pending the outcome of a legal dispute, and was on the verge of a default. Should oil and copper prices collapse, Angola, Gabon, Congo and Zambia may encounter difficulties in servicing their sovereign bonds.
To ensure that their sovereign-bond issues do not turn into a financial disaster, these countries should put in place a sound, forward-looking and comprehensive debt-management structure. They need not only invest the proceeds in the right type of high-return projects, but also ensure that they do not have to borrow further to service their debt.
These countries can perhaps learn from the bitter experience of Detroit, which issued US$1.4 billion worth of municipal bonds in 2005 to ward off an impending financial crisis. Since then, the city has continued to borrow, mostly to service its outstanding bonds. In the process, four Wall Street banks that enabled Detroit to issue a total of US$3.7 billion in bonds since 2005 have reaped US$474 million in underwriting fees, insurance premiums and swaps.
Understanding the risks of excessive private-sector borrowing, the inadequacy of private lenders’ credit assessments and the conflicts of interest that are endemic in banks, sub-Saharan countries should impose constraints on such borrowing, especially when there are significant exchange-rate and maturity mismatches.
Countries contemplating joining the bandwagon of sovereign-bond issuers would do well to learn the lessons of the all-too-frequent debt crises of the past three decades. Matters may become even worse in the future, because so-called “vulture” funds have learned how to take full advantage of countries in distress. Recent court rulings in the US have given the vultures the upper hand and may make debt restructuring even more difficult, while enthusiasm for bailouts is clearly waning. The international community may rightly believe that both borrowers and lenders have been forewarned.
There are no easy, risk-free paths to development and prosperity. However, borrowing money from international financial markets is a strategy with enormous downside risks and only limited upside potential — except for the banks, which take their fees upfront. Sub-Saharan Africa’s economies, one hopes, will not have to repeat the costly lessons that other developing countries have learned over the past three decades.
Joseph Stiglitz is a Nobel laureate in economics and University Professor at Columbia University. Hamid Rashid is a senior economic adviser at the UN Department of Economic and Social Affairs. The views expressed here do not reflect those of the UN or its member states.
Copyright: Project Syndicate