"If the parties cannot come to some form of agreement before the end of the 15 day grace period, then the default will add another headwind to future negotiations as bondholders would likely look to include some means of recuperating their losses from the government. The game of chicken could continue until the next coupon payment comes due six months down the line."

Mozambique to miss $60m payment on eurobonds

By:

Emma Rumney

17 Jan 17

Mozambique will miss a $60m interest payment on Irish-listed eurobonds due tomorrow, the country’s finance ministry has said.

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A port in Maputo, the capital of Mozambique

The country’s public finances have been in dire straits amid falling commodity revenues and revelations that the government had hidden over $1.4bn in debts from its creditors, prompting the International Monetary Fund and others to cut off aid.

In a statement posted on the Irish Stock Exchange website yesterday, the Mozambique Ministry of Economy and Finance said the “deteriorating macroeconomic and fiscal situation” made for an “extremely limited” capacity to repay its debts.

The country has a 15-day grace period to settle the payment. Otherwise it will mark Africa’s first sovereign default for five years.

Mozambique had told unwilling creditors in October that it needed to restructure its debt, and sorely needs the IMF to resume aid to stabilise its economy and public finances.

Donor funds, which were withdrawn in the wake of the hidden debt revelations, had made up a quarter of the country’s budget.

The government had hoped to have secured a deal with the IMF and commercial creditors by now. However the finance ministry said yesterday that for this to happen it had to “take steps with its external creditors to put the country’s debt on a sustainable path”.

Mozambique had announced to its disgruntled commercial creditors that it needed to restructure its debts in October. However investors, who formed a creditors’ committee, declined to negotiate until the authorities published an audit into the previously undisclosed debt and reached a deal with the IMF.

A default, along with further defaults on other bonds predicted by analysts next week, could end the stand-off.

David Earnshaw, an analyst at BMI Research, said however that the "ball has always been firmly in the bondholders' court". He continued: "It's now a question of who is prepared to sustain the most damage.

"There is a chance that one party will capitulate and some arrangement will be made before the end of the 15 day grace period, but this seems unlikely unless the government is willing to about face and prioritise bondholders above the country's other creditors.

"If the parties cannot come to some form of agreement before the end of the 15 day grace period, then the default will add another headwind to future negotiations as bondholders would likely look to include some means of recuperating their losses from the government. The game of chicken could continue until the next coupon payment comes due six months down the line."

The $727m bonds, due in January 2023, sunk again against the dollar yesterday, approaching a record low of 50 cents on the dollar last week – a decline triggered when JP Morgan predicted Mozambique would default on tomorrow’s payment.

 Overall, the country has an external debt burden worth $10.1bn, including $1.73bn to commercial creditors.

Over the course of last year, the country’s currency collapsed by over 80% against the dollar, exacerbating its difficulties in repaying dollar-denominated debts.

Amid climbing double-digit inflation, ballooning debt and downgraded growth of 3.4% (compared to 6.6% in 2015), the country has said it has no ability to pay without a restructuring deal.

It has hired law firms White & Case and Lazard Fréres to negotiate and advise on the restructuring.