Friday, 13th January 2023. Jubilee House, Ghana’s presidential palace. In attendance: the movers and shakers of public and commercial finance in the country. 

Arrayed on one side was the government, led by the Vice President, in his capacity as “Head of the Economic Management Team” (EMT). On the other side was a motley crew of finance industry representatives, from the insurance, securities, banking and related industries. The agenda: Ghana’s tottering domestic debt restructuring exercise.

Five and a half weeks since the Finance Minister announced a move to default on Ghana’s domestic debt by persuading creditors to exchange their current bonds for new, significantly lower-value, versions, the program seemed hopelessly stuck. The EMT’s goal for the meeting was thus to break the logjam. Why, though, is the program stuck?

In an earlier essay, we catalogued a list of defects in Ghana’s debt restructuring/exchange model, but the focus was mainly on broad strategic issues. At the Friday meeting in Jubilee House, tactical considerations took center-stage.

When on 5th December the government announced its offer to domestic creditors to turn in their current bonds and come for new ones guaranteed to lose them billions of Ghana Cedis (GHS), it gave them two weeks to comply. No serious prior negotiations had taken place. Nothing had been agreed in principle, not to talk of anything approaching even the most high-level consensus among the biggest creditors on general terms. 

Near as we can tell, no government on Earth has succeeded in pulling off such a fast turnaround as Ghana tried to achieve last December. Even the fastest restructurings, such as those of Ecuador and Argentina, have in recent decades typically taken between four and five months of consultations before the formal launch of the actual exchange process, which is then treated as a formality. 

Ghana’s style is more reminiscent of Argentina’s 2020 default, which initially consisted of a series of unilateral offers and amendments in a take it or leave it fashion. At every round, bondholders rejected the offer and subsequent amendment. Not even the intervention of Pope Francis made a difference until the right set of concessions allowed the main bondholder groups to consent. 

Seeing as Ghana’s main advisor, Lazard Freres, has advised Ecuador too, the likelihood of a protracted stalemate in the absence of concessions should have been clear to the government side from the outset, so why have things panned out like Argentina’s?

It would appear that Ghana’s Finance Ministry has been counting on a “divide and conquer” strategy. It has so far been nonchalant about calls to support the formation of a joint creditors’ negotiating group. Given the costs involved in obtaining top-notch legal and financial modelling advice, creditor coordination has long been a daunting prospect in sovereign debt restructurings. 

The government apparently believes in keeping the creditor front fragmented and uncoordinated as a way of minimising resistance. Unfortunately, such “divide and conquer” strategies are only effective if the government could also make differentiated offers to different creditor groups or engage in selective defaults of specific classes of bonds. Neither option is open to the government in Ghana’s context, thus rendering a divide-and-conquer approach a complete waste of everyone’s time.

That fact was amply evident on Friday when the different industry groups converged to confer with the EMT. It soon became apparent to everyone in the room that the government, as of that morning, had zero concrete commitment from any major creditor group to the debt exchange. 

The securities industry representatives (the folks running the mutual funds, independent brokerages and various collective investment schemes) said they were willing to step up and accept the latest amended offer if the government will countersign on a covenant promising to upgrade their settlement to match any better terms eventually given to any other group. A point which illustrates the futility of the divide-and-conquer strategy: you get an assortment of contingent proposals from every creditor group playing a “wait and see” game. The game theory analogue is the famous stag and rabbit/hare hunt where agents attempt to balance the benefits of individual moves with the higher payoffs of social cooperation.

Attempts by the Finance Ministry to solicit respect for the January 16th deadline went nowhere. Obviously, different creditor groups with their separate sets of concerns can obviously not resolve them at such a meeting when no prior efforts had been made to coordinate their claims and issues into a uniform negotiating position. Said differently, it is pointless for the government to encourage separate negotiations and yet when faced with a time crunch try and push for a quick joint resolution in a common forum.

Unsurprisingly, therefore, the Finance Minister’s offer for the creditor groups to accept the finality of the 16th January deadline and be granted a few additional days to tidy up the paperwork failed to persuade them.

What is fascinating about all this is how respectful the creditor groups have been despite the casual treatment they have received to date. As anticipated from the outset, banks and “savings & loans” companies are the most susceptible to the quiet force of the government’s enormous regulatory power. So, at this point, all that separates the banks and the government from a deal are five relatively surmountable blocks:

• 
  The banks want the government to get concrete on the “regulatory forbearance” it has been promising so far by agreeing to a discount rate for valuing bonds as part of the capital determination. The banks want a lower discount rate to reduce the valuation gap between the new and old bonds. They are inclining towards 7.5% (contingent on further engagement with the Institute of Chartered Accountants in Ghana). The Bank of Ghana insists on 12%. The choice of discount rate or factor will establish the present value of the bonds the government is tendering to replace the old bonds.
• Linked to the above are disagreements over the “expected credit losses” from the impairment of bank assets (in the form of government securities in this case, not loans or advances) being occasioned by the proposed debt exchange. 
• Obviously, until the government and the banks can agree on how to quantify losses as a result of the exchange they cannot move on to settle the issue of tangible effects on the bank’s income statements and balance sheets. As far as the banks are concerned, the expected financial impacts are: pretax losses of $1.2 billion, liquidity shortfalls of $1.6 billion, and a capital shortfall of $1.3 billion (using the retail exchange rate). Essentially, massive hits to the bottom line with troubling implications for their capacity to keep issuing credit, maintaining jobs and investing in financial infrastructure. Worst-hit financial institutions may have to let 40% of their workers go. 17 of the 23 licensed “deposit money banks” will see their capital adequacy ratio fall below the regulatory minimum. And 9 of them will experience negative equity. In short, the government is refusing to acknowledge the full impact of the debt exchange on the financial sector; yet, without convergence on this point, countermeasures cannot be agreed.
• The banks cannot countenance the stepped-up coupon (interest rate) model for the new bonds with its zero payment (and no deferral) payout structure for 2023. The banks require a simple uniform structure of equal payments across the life of each instrument. Furthermore, this uniform rate is, in their view, best set around 12.5% per annum.
• Government’s new bond offering comes with a well-known Trojan Horse: legal clauses that would make it easier for it to vary the terms of the bonds in the future. The banks want these clauses expunged.

Beyond these 5 main demands, there are a number of other areas where confusion still prevails. One such is the treatment of the bonds denominated in US dollars, whose status remains uncertain. The second is the vaunted “Financial Stability Fund” (FSF).

The government has tried to bloviate around these matters and made many vague assurances of monies committed by the World Bank to cover 30% of the $1 billion fund size. Sources at the World Bank suggest various contingencies must first be met before any such disbursement will happen. Meanwhile, the other claimed sources of the rest of the money: the Germans (KfW), the Paris Club of rich western nations, and the African Development Bank have so far not commenced any formal negotiation of any agreement to offer any cash to this facility. Pressed to the wall, Ministers responded airily that the debt exchange cannot be held hostage by such matters and that banks should first sign up before being told even basic things such as what interest rate borrowing from the facility would attract. The industry pushed back on eligibility criteria.

At this point, the Finance Minister tried another tact. Why don’t the banks publicly announce their consent to the debt exchange program and then request a date extension to hammer out a few outstanding issues? Naturally, the bank representatives demurred. They weren’t born yesterday. They insisted on an agreement on the key outstanding issues first. 

At which point, Lazard Freres barged in and sought to gaslight the eminent company. An extension can’t be contemplated without wrecking the credibility of the whole debt exchange program and furthermore threatening the IMF deal. After much handwaving, they calmed down, loosened their tie, sipped some seltzer, and grudgingly faced the reality of a no-deal on Monday the 16th of January.

All of the above is to say, the government went into what was billed as a crunch meeting to close a deal to allow an announcement one working day away when it had made very little effort to grapple with these very compact issues for two weeks now. As has been repeatedly mentioned on these pages, the government’s job has been far easier than in many comparable national contexts in similar circumstances.

Till date, domestic institutional creditors have accepted the principle of significant losses. They have also not demanded several of the concessions that elsewhere others have extracted, like negative pledge clauses, buyback transparency terms, future upside sharing and other contingent windfalls, enhanced protection etc. They even seem to have backed down on initial requests for the government, in its issuer capacity, to underwrite the legal and other advisory service costs of creditor coordination. They seem to be operating with far less legal ammo than should be the case in a situation with such large amounts of money involved. And some of them, especially the mutual funds and asset managers, are even willing to sign up provided they are granted “pari passu” assurances. And yet the government has still failed to clinch a deal. 

The recalcitrance of the government about deepening consultations and accelerating coordination among creditors is completely bizarre considering its lack of options should holdouts remain above 40%. Should an industry group collectively refuse to sign the exchange papers, all the punitive measures at the disposal of the government become useless as they cannot crush a whole industry? And any attempt to default on the holdings of any significantly large group risks setting off a contagion that can ruin entire sectors without sparing those who consented to the exchange.

The meeting with the institutional shareholders thus ended with a commitment to engage further through correspondence this week. It is safe to say that the government will not be able to announce any program success rate tomorrow because frankly at this stage it has no firm commitments from any major creditor group.

After the institutional creditor representatives departed, the government side retired to deliberate on the now politically explosive situation of mobilising individual bondholders.

In a previous essay, IMANI raised caution about individual bondholders as follows:

Whilst households and individuals hold just about 13% of government debt, they are also the most politically significant group. They are the ones most likely to bring class action suits against the government and mount political agitation to stop the process as they are not as exposed to government pressure to the same extent as the banks, institutional funds and treasury departments of large companies.

From all indications, the Vice President and key allies of his in government recognise the scale of the political blowback that reneging on the promise not to add individuals and households to the debt exchange program has triggered. Whilst the Finance Minister is at this stage focused purely on securing enough liquidity relief so that his already fragile fiscal program for 2023 does not fall apart, and, even more vitally, the IMF program is not derailed, the Vice President has a somewhat more strategic perspective in mind. Unsurprisingly, the mood in the government is tilted towards restoring the exemptions for individual bondholders, notwithstanding the discomfort of the Finance Minister and his technical advisors.

As we have frequently said on this site, the Finance Ministry’s lack of political economy savvy, now compounded by over-dependence on foreign technical advisors with zero awareness of how social consensus is achieved in Ghana, is a major threat to both the debt restructuring effort and the IMF program. 

It is actually a miracle that both programs are still technically on track and is likely to survive in highly constrained forms. The total amount of liquidity relief likely to be generated by the debt exchange program is now estimated to be lower than 40% of what the government set out to achieve. To preserve the credibility of the IMF program, additional fiscal consolidation in the form of expenditure cuts is now inevitable. Even after exempting pension funds and contemplating re-exempting individual bondholders, the government still faces wildcat litigation risk because offshore investors who hold local bonds are unwilling to take the deal on offer.

The adamant refusal of the government to mobilise national sentiment behind its economic recovery strategy and to build a broad social and bipartisan consensus behind the measures has led to highly suboptimal outcomes guaranteeing a significant delay in Ghana’s effort to exit the country’s biggest economic crisis in 40 years.