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How the International Bond Market Might Influence Côte d’Ivoire
December 29, 2010
With short term U.S. treasury paper paying zero percent, where in the world can you get 14.7%? Cote d’Ivoire. The yield on Ivorian Eurobonds spiked on fears of a resumption of civil war and prospects of a default on a payment due December 31st. Bondholders are right to worry. The Gbagbo junta, cut off from both the World Bank and its own central bank, is reportedly running out of cash and the cabal is likely to use any remaining money to pay the military rather than foreigner creditors.
But Gbagbo & Co, assuming they can scrape the cash together, may have an incentive to pay if they think they might be able to borrow more. A desperate regime might offer anything—ridiculously high interest rates, land sales, other state assets—in exchange for new cash now. And given international law and precedent, once President Ouattara finally takes over, his government—and the Ivorian people—would be liable for any obligations made by Gbagbo. That’s not just unfair, it undermines the international community’s own pressure for him to step down and cede the presidency to the winner, Alassane Ouattara.
Here’s where a new idea of contract sanctions (or, in wonkspeak, a “declaration of non-transferability”) from CGD’s Prevention of Odious Debt Working Group might be especially useful to squeeze Gbagbo now and protect Ivorians from being held responsible later. A declaration by the African Union (and publicly supported by the US, UK, and France) that any new loans would be considered illegitimate and invalid might stop cynical investors from giving Gbagbo a lifeline and prevent vulture funds from pursuing Ivorian assets in the future. It also should make that 14.7% yield look a lot less attractive.
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12 Responses to “How the International Bond Market Might Influence Côte d’Ivoire”
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December 29th, 2010 at 1:56 pm
I wonder if contract sanctions are necessary, given that the multilaterals (including multilateral lenders) and major economies like the US no longer recognize the Ghagbo government as legitimate. Under these circumstances, it seems Ghagbo would be unable to engage in any legitimate transaction involving state goods or property – and any new bonds, assuming anyone would issue them, would have spectacular rates of interest because they would almost certainly be unenforceable. The steps you lay out are excellent ones in situations where legitimacy is in question – here, there is no real debate outside of Cote d’Ivoire on who the legitimate government is . . .
December 30th, 2010 at 12:05 am
Great idea. why isn’t it being done? Gbagbo is probably buying arms as I write this.
January 3rd, 2011 at 4:41 pm
So far, not being able to access his accounts does not seem to be influencing Gbagbo’s thinking. Hubris seems to be overtaking him and his entourage since they are now floating plans to issue their own currency. They want to call it Ivoirian, but I’m not sure who they will convince to use it.
http://www.africanews.com/site.....ages/36877
January 4th, 2011 at 3:59 pm
One other factor should be mentioned. Gbagbo already has a lifeline from the cocoa exporters and the off shore oil companies who are not entering into new contracts, but are constrained to pay export taxes and fees to the Gbagbo government if they want to continue business. These revenues are significant enough to keep Gbagbo’s soldiers and mercenaries paid, if not to pay all the government workers. If the international community really want sanctions to bite, some way of ending these payments will have to be found.
January 4th, 2011 at 5:02 pm
While Todd probably can speak to this more directly, it seems to me that as the Gbagbo government is no longer recognized by the international community or international lenders, the cocoa exporters and offshore oil companies will not be paying him – they could pay into Cote d’Ivoire’s national coffers to meet their obligations, but Gbagbo is now unable to access those accounts. While Gbagbo could probably extort cocoa producers at various points in the supply chain with his control of internal transportation and ports, what is more likely is that the producers will reverse the flow of cocoa smuggling, currently flowing in from Ghana and out through CIV and start smuggling back to Ghana, and out through Takoradi and Tema, thus ducking the extortion. As for the offshore producers, I doubt CIV has the capacity to really extort them . . .
January 4th, 2011 at 5:07 pm
Your article highlights a critical point which is at stake in the current post-election crisis. There is no doubt that Gbagbo, in the face of financial drying-up, will attempt to any mean available to survive. So, illegal contracts or sales of Government properties are likely to be used by Gbagbo. In this regard, the international communauty should remain vigilent.
In my view, financial sanctions will not work, and Gbagbo will not step down. But, if the crisis lasts for longtime, the economic impact will be severe for the already bleak economic situation of Cote d’Ivoire. In addition, a risk of resumption of the war is high, an eventuality that will compound the human costs of the crisis. I think that further solutions, even military, should be envisaged right now.
January 4th, 2011 at 5:10 pm
Great idea, Mr. Moss, but Carr’s response makes clear that any borrowing by Gbagbo is already illegitimate and therefore unenforceable. Still, even if these indirect financial sanctions work the crisis can too easily stretch out and cause hundreds or thousands to die. It would be cheaper and quicker to have a Security Council resolution authorizing the use of force under AU aegis. (Goodluck Jonathan could certainly use the additional credibility in the region…) The wording of such a resolution could include prohibiting most payments to the regime, and its passage is also likely to make the Ivorian “army” melt like chocolate in the sun.
January 4th, 2011 at 5:33 pm
This problem is worrisome because Gbagbo has access to a number of potentially lucrative lifelines. Getting all investors, non-state actors and bilateral stakeholders to sing from the same sheet is a monumental task — and time is running out. The longer Gbagbo is allowed to remain the more entrenched and predatory he will become. He knows he could count on a number of sources to augment funding for recurrent spending, which is his immediate challenge. Supranational entire (like the UN or EC) must exercise muscular diplomacy to help plug these gaps and complete Gbagbo’s isolation. Unfortunately, this is not being done. We seem resigned to endless, fruitless ‘talks’ led by a hapless group. Loans and bond issues are complicated matters. Legally, we would need to answer the question: “At what point does an administration become illegitimate?” Even though he stole the elections, Gbagbo was sworn in according to the Ivorian constitution. Unfortunately, liabilities incurred by his regime might be immoral but not necessarily illegal. An advocacy campaign might help, but at almost 15% Gbagbo is unlikely to have a shortage of takers.
January 5th, 2011 at 11:46 am
Thanks for all the terrific comments. I think the longer the crisis is drawn out, the more important this will become. No one is lending to Gbagbo today, but if he is still clinging on in 3-4 weeks time, you may see some rogue “investors” start to circle and hope they can get claims on assets for later (say, an Angolan or Russian firm buys a new offshore license). These are the kinds of transactions an international declaration might make less attractive — not only to deny Gbagbo money to keep going but probably more importantly to protect the Ivorian people from having national assets stripped.
January 5th, 2011 at 1:11 pm
Contract sanctions would only worsen the economic situation in Cote d’Ivoire and put pressure on the population. Going after Gbagbo and his entourage’s (family and associates) wealth and freedom of movement is the wiser approach.
January 6th, 2011 at 3:24 am
l think one way or the other some people are missing the link here. Though the issue of sanctions might work here, Gbagbo has the army on his side which is the greatest weapon. At the moment he is not concerned about the economy, his primary aim is to consolidate power and deal with the economy later. The other thing that one needs to understand is the fact that, the country at one time experience civil war and nationals would not want to be involved in another war again. So the issue of consolidating power is crucial at the moment unlike the economy.
January 6th, 2011 at 11:04 pm
Gbagbo’s military power is linked to his finances. He may have the loyalty of senior officers (since he put them in place) but the rank and file are divided and will not put themselves at risk if they are not paid.
I wish I could be more confident that Gbagbo’s finances are being squeezed but I am not. Look at the companies who have offshore concessions. Two are registered in the Cayman Islands and one is Russian. I suspect they were selected because of their willingness to make payments to people in power. Apparently the port of San Pedro continues a fast pace of cocoa exports and with Gbagbo’s people running that port, I am sure some share of the value of the exports is making its way into Gbagbo’s coffers.