Countries usually borrow in their own currency. For instance, Ghana’s government borrows by issuing cedi-denominated bonds, treasury bills or notes. Eurobonds however are bonds denominated in a different currency. For Ghana those bonds have been issued in dollars. The first problem with Eurobonds is that the interest rate charged to developing nations is excessively high. While US interest rates can hover around 2%, Ghana’s outstanding $13bn in issued Eurobonds range from 7.75% – 10.75%. This means each year we pay a lot in interest.
The second problem is that because these bonds are in USD, they get more expensive to repay each year because of currency depreciation. So as the cedi has depreciated significantly we would need more cedis to pay interest for the same dollar value of the bonds. The third problem is that Eurobonds are issued to PRIVATE creditors. These are not nations or multilateral bodies but powerful fund managers who will go to extraordinary lengths to get their money back, as Argentina painfully learnt after defaulting in the 2000s.
So the issue of debt forgiveness or HIPC-style relief is not an option. Ghana will pay back no matter how long it will take, mostly through higher taxes, accepting a lower standard of living through a weaker currency, giving up a larger share of export revenue. You’ve probably heard about debt restructuring and how multilateral partners led by France & China have reached a deal with Ghana. That was for about $6bn in debt; the debt to private Eurobond holders is $13bn. And negotiations with them would be tougher. The fear is that because Ghana hasn’t paid any interest on eurobonds since late 2022, all those arrears would be added to the debt. The bondholders could demand the inclusion of a “value recovery instrument” which means that if Ghana does better than projected it will pay more. Some experts believe that the combination of value recovery instruments and the high Eurobond interest rates mean that when nations default, bondholders actually end up making more money than if the nation did not default. So there’s no escape.
Why would the government go for such dangerous bonds in the first place? Because it provides a quick fix – Eurobonds stabilise the currency and inflation in the short-term and allow for people to consume more imports, creating the sense that the economy is booming. So instead of doing the difficult work of improving export values and volumes to earn foreign currency, we take the shortcut of borrowing billions in foreign currency. The idea is that we don’t retire the bonds but that we borrow from new creditors to pay old creditors.
Our first Eurobond was in 2007. In 2013, we went back to the market and then turned it into an annual affair after that. Always going every January/February to borrow to give the cedi a fake boost. In 2020, the government borrowed $3bn in Eurobonds. In 2021, another $3bn. The cedi was stable thanks to these inflows. The combination of rising US interest rates & Ghana’s government overspending shut us out of the market in 2022 and the cedi began that remarkable slide we’ve seen. The country has outstanding Eurobond payments with one 4-year instrument issued in April, 2021 that is expected to mature in 2025; the next maturity of a 7-year instrument also issued in 2021 is in 2029, then two others issued in the same year to mature by 2034 and 2042. These outstanding debt obligations to the international capital market show that Ghana will keep paying them until the year 2060.
It is our wish notwithstanding that Ghana don’t borrow a USD more of these expensive loans. But given that shortcuts for electoral gain are a thing, we feel any govt will quickly sign a deal that will get the country back borrowing again. But we hope it doesn’t come to that.
This editorial was by the ceditalk.com editorial board