LONDON — Mozambique’s Minister of Economy and Finance, Adriano Maleiane, has told creditors at a meeting in London that there is no way Mozambique can pay any of the commercial debt incurred illegally by three State-owned companies in the near future.

What is tactfully referred to as a commercial debt is in reality the illegal debt of the three companies — Ematum (Mozambique Tuna Company), Proindicus and MAM (Mozambique Asset Management) — which took out loans totalilng more than two billion US dollars in 2013 and 2014 from the London branches of two European banks, Credit Suisse and VTB of Russia.

Mozambique is suggesting that the creditors take a haircut of 50 per cent of the 636 million dollars of arrears in interest payments. Maleiane presented three debt restructuring scenarios, with repayment periods ranging from eight to 16 years, but only the first two seemed realistic.

In scenario one, with the longest repayment schedule, the principal would only be repaid in years 14 to 16. Assuming year one is 2019, no principal would be repaid until 2033. Interest would start at two per cent and rise to six per cent.

Scenario two has a shorter repayment period, of 12 years, and the principal would be repaid in years 10 to 12 (so starting in 2029). Interest would start at 1.5 per cent and rise to five per cent, and the creditors would be expected to take a further 10 per cent haircut.

The two banks had granted the loans despite a complete lack of due diligence. Even a cursory glance at the three companies would have shown that they had recently been set up by the Mozambican State Security and Intelligence Service (SISE), and had no track record of any kind.

Nonetheless, the banks were eager to offer the money, once the Mozambican government of the time, under President Armando Guebuza, provided guarantees for the loans. But, as the banks could easily have discovered, those guarantees were illegal a they exceeded the ceiling on guarantees established in the 2013 and 2014 budget laws, and violated a clause in the Mozambican Constitution which states that such debt can only be authorised by the parliament.

Maleiane told the creditors that Mozambique remains debt-distressed. His presentation showed that the debt to Gross Domestic Product (GDP) ratio rose from 88 to 128 per cent from 2015 to 2016. It fell back to 112 per cent in 2017, thanks mainly to the stabilisation of the exchange rate of the Mozambican currency, the metical, as a result of draconian monetary policies adopted by the central bank.

The key problem is that while the commercial debt (essentially Ematum, Proindicus and MAM) is only 13 per cent of the foreign debt, the high interest rates charged and the relatively short repayment times mean that the debt accounted for 41 per cent of total debt servicing. Or would be, if Mozambique was servicing these debts at all which it has not been doing since mid-2016. In fact, total arrears on the three loans now stand at 636 million USD.

Bilateral debt accounts for 45 per cent of total debt servicing, and multilateral debt (to bodies such as the World Bank and the African Development Bank) accounts for 14 per cent. This would be manageable � it was the irresponsible loans to Ematum, Proindicus and MAM, and the illicit guarantees given by the Guebuza government which pushed Mozambique into debt distress.

Maleiane’s prediction was that Mozambique’s debt trajectory will remain unsustainable in the medium term in spite of fiscal adjustment.

All the key ratios will remain far above what is generally regarded as acceptable levels. For example, the International Monetary Fund (IMF) sets a threshold of 250 per cent for the ratio of foreign debt to government revenue. For Mozambique, the ratio is currently 338 per cent, and is expected to fluctuate between 315 and 335 per cent over the next four years.

The ratio of debt service to revenue should not be above 20 per cent but it is currently 37 per cent. It is expected to fall to 28 per cent by 2022.

As for the debt service to exports ratio, the threshold is currently 20 per cent, but the IMF is adjusting it to 15 per cent from 1 July this year. In Mozambique’s case, this ratio is expected to stay at around 21 per cent for the next couple of years, and will not drop to below 20 per cent until 2022.

Maleiane has rejected attempts by the Ematum bondholders to secure preferential treatment. The Ematum bonds (now renamed MOZAM2023 bonds) will be treated in exactly the same way as the Proindicus and MAM debts.

Maleiane’s proposals are unlikely to win him friends anywhere. The creditors will want more money and sooner, while Mozambican civil society organisations argue that, since the debts are illegal, there should be no repayment at all.

This is also the position taken by debt campaigners in Britain. The Jubilee Debt Campaign argues that Mozambicans should not pay a penny for debts contacted in violation of Mozambican law (and probably of British law too, since it was the London branches of Credit Suisse and VTB that handled the loans). If bondholders want their money back they should demand it from the banks who deceived them, the campaign says.

At the London meeting Tuesday, Michelle Lemarche of Lazards, the government’s debt advisers, took the cautious line that the negotiations are being held on the assumption that all obligations would be recognized.

Those who want the debts officially declared illegal have been betrayed by the habitual lethargy of the Mozambican legal system. The Attorney-General’s Office (PGR) has been investigating Ematum, Proindicus and MAM since 2015, but has still not charged anybody with any offence � not even the then Finance Minister, Manuel Chang, who knowingly signed guarantees that he knew broke the budget law.

If the PGR does not act quickly, then the government and the creditors may strike a deal under which the Ematum, Proindicus and MAM debts are bundled up into new loans, making legal action far more difficult.