The Wall Street Journal has a great story on Mozambique’s hidden debt scandal:

The government picked Mr. Safa’s company, Privinvest, to supply ships, including patrol and surveillance vessels, and asked its help getting financing. The company disputes the characterization of the ships as military, saying they weren’t outfitted with weapons. Privinvest approached Credit Suisse about a loan for Mozambique, and a committee of senior executives, including then-CEO Gaël de Boissard, approved the deal.

Credit Suisse’s top brass signed off in part because the bank had pioneered a way to lend in developing countries without taking on much risk.

The bank found it could purchase sovereign-debt insurance through the Lloyd’s of London insurance market to hedge as much as 90% of the loans against default. Credit Suisse charged higher interest rates on the debt than its insurance premiums, pocketing the difference mostly risk free.

The insurance policies Credit Suisse used only covered governments. So when Mozambique wanted to borrow the money through state-owned companies instead, the bank came up with a twist: Mozambique would cosign.

FT notes that:

The debt was originally borrowed via a special purpose vehicle for Ematum [tuna fishing company], an arrangement that does not require the same level of disclosure as a sovereign bond issue.

Basically Credit Suisse, the Russian VTB Capital, and their Mozambican accomplices knew exactly what they were doing.

When the money got to Mozambique it mostly went into private pockets. The proposed tuna business the loans were intended to finance went bust (realizing a paltry 2.5% of projected sales). And the security purchases (ostensibly to secure Mozambique’s vast yet-to-be-developed gas fields) proved useless.

Meanwhile…

…….conditions in Mozambique are worsening. Its foreign-currency reserves fell to $1.8 billion in May from $2 billion in January, and it is seeking $180 million in food aid. Intensified fighting has sent more than 10,000 refugees to neighboring Malawi, according to the U.N. High Commission for Refugees.

Credit Suisse is a Swiss financial services company. According to the WSJ Privinvest’s struggling subsidiary Constructions Mécaniques de Normandie built the ships sold to Mozambique. The latter is, of course, based in France. Corruption knows no borders.