The Tuna Bonds Scandal and the fishy business of hidden debt

Summary

The Tuna Bonds Scandal and the Fishy Business of Hidden Debt

Podcast: The Indicator from Planet Money
Hosts: Weyland Wong & Darien Woods
Release Date: December 10, 2024

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1. Introduction to the Mozambique Tuna Bonds Scandal

In the December 10, 2024 episode of The Indicator from Planet Money, hosts Weyland Wong and Darien Woods delve into the intricate case of Mozambique's hidden debt, popularly known as the Tuna Bonds Scandal. This financial debacle not only exposed deep-seated corruption but also underscored the broader issue of clandestine government borrowing.

2. The Genesis of the Tuna Bonds Scandal

Back in 2013, the Government of Mozambique embarked on what appeared to be an ambitious venture to bolster its tuna fishing industry. They established a new fishing company, securing an $850 million loan from international investors to acquire a fleet of 24 new fishing boats. However, as Darien Woods narrates, "those boats never really got used" (00:39), revealing that the government's true intention was not to develop the fishing sector but to clandestinely accumulate debt.

3. Unveiling the Hidden Debt Mechanism

The scandal unraveled when it was discovered that, alongside the publicly acknowledged $850 million loan, Mozambique had secretly borrowed over $1 billion through the same investment banks. This covert accumulation of debt went unnoticed for years, leading to severe economic consequences. As Woods succinctly puts it, "It's a financial scandal that crashed Mozambique's economy" (01:09).

Economists Sebastian Horn from the University of Hamburg and Cesar Sosa Padilla from the University of Notre Dame investigate this phenomenon, revealing that hidden debt is not an isolated incident but a pervasive issue affecting nearly 150 countries globally. The researchers identified approximately $1 trillion in hidden debts, averaging about 1% of each country's GDP (04:38).

4. The Mechanics of Hidden Debt

Hidden debt often arises from discrepancies between reported borrowing figures and actual funds borrowed. Horn explains, "There's a diplomatic visit and you sign a couple of contracts, and each of the parties treats it as a state secret" (06:11). Such secrecy, especially in loans directly obtained from other nations rather than through public financial markets, makes the debt harder to track and more susceptible to concealment.

These unnoticed debts typically accumulate during prosperous economic periods, only coming to light during downturns when governments struggle to service the borrowed amounts. This pattern was evident in Mozambique's crisis following the Tuna Bonds revelation, as well as in Zambia's default after undisclosed loans from China surfaced (06:23; 06:43).

5. Economic and Social Repercussions

The exposure of hidden debt often forces governments to implement austerity measures to balance their budgets. In Mozambique, the Tuna Bonds Scandal led to severe economic downturns: economic growth was halved, inflation spiked, and nearly 2 million people were plunged into poverty (07:26; 07:50).

Austerity measures typically involve cutting social welfare programs, freezing government wages, and raising taxes. A representative from a Mozambican nonprofit explained to Al Jazeera how these cuts adversely affected essential services like health, education, and access to clean water (08:06). Citizens bore the brunt of these policies, experiencing reduced access to necessary services and a decline in their standard of living.

6. Legal Fallout and Accountability

The Tuna Bonds Scandal prompted significant legal repercussions both within Mozambique and internationally. Officials implicated in the scandal faced court cases in Mozambique, New York, and London. Notably, Credit Suisse, the investment bank involved in arranging the secret loans, paid approximately $500 million in penalties and fines (08:38). Additionally, Mozambique's former finance minister was convicted in a U.S. federal jury on fraud and money laundering charges (09:02).

Despite attempts to salvage the situation, the tangible assets purchased with the illicit loans, such as the fleet of 24 tuna boats, failed to find buyers during auction, leaving them unused and symbolizing the unfulfilled promises made to create jobs and boost the fishing industry (09:02).

7. Broader Implications of Hidden Debt

While the focus of the episode centers on Mozambique, the ramifications of hidden debt extend beyond a single nation. Higher-income countries like Greece have also experienced crises due to concealed borrowing, as seen during the Greek economic crisis of 2009. However, wealthier nations possess greater resilience to absorb such shocks, whereas lower-income countries like Mozambique are more vulnerable to economic collapse when hidden debts are exposed (06:58; 07:08).

8. Conclusion: Shedding Light on a Global Issue

The Tuna Bonds Scandal serves as a poignant example of how hidden debt can destabilize economies and adversely affect millions of lives. Through the investigative efforts of economists like Horn and Padilla, The Indicator from Planet Money highlights the urgent need for transparency in government borrowing and robust mechanisms to prevent the concealment of public debt. As the episode concludes, it becomes clear that addressing hidden debt is crucial for fostering economic stability and safeguarding the well-being of citizens worldwide.

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Notable Quotes:

• Darien Woods (00:39): "Those boats never really got used."
• Sebastian Horn (06:11): "There's a diplomatic visit and you sign a couple of contracts, and each of the parties treats it as a state secret."
• Cesar Sosa Padilla (05:05): "I never suspected that this was so pervasive because this happens across all geographies and also through time."

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This summary encapsulates the key discussions, insights, and conclusions from the episode "The Tuna Bonds Scandal and the Fishy Business of Hidden Debt" on The Indicator from Planet Money. By exploring the depths of Mozambique's financial misconduct, the podcast sheds light on a critical yet widespread issue affecting nations globally.

Transcript

[Weyland Wong]

This is the indicator from Planet Money. I'm Weyland Wong.

[Darien Woods]

And I'm Darien woods. Back in 2013, the Government of Mozambique said it was going fishing for tuna. Mozambique is in Southeast Africa and borders the Indian Ocean, which has a lot of tuna.

[Weyland Wong]

The Mozambique government set up a new fishing company. This company borrowed $850 million from international investors and it spent some of that money on a fleet of 24 new fishing boats.

[Darien Woods]

But those boats never really got used. It turns out that the government wasn't all that interested in building up its tuna fishing industry. What some state officials were actually interested in was taking out loans and not telling anyone about it.

[Weyland Wong]

Yeah. Around the same time, the government secretly borrowed over $1 billion through the same investment banks. When this debt was uncovered a few years later, it caused a huge scandal involving bribery and kickbacks and the economy tipped into crisis.

[Darien Woods]

It's a financial scandal that crashed Mozambique's economy.

[Weyland Wong]

Here's news outlet Al Jazeera reporting on the fallout in 2022.

[Darien Woods]

It's become known as the hidden debt scandal and is one of the biggest corruption cases on the African continent this century. A court in Mozambique. It was also known as the tuna bond scandal and it's a high profile example of a government surreptitiously borrowing money. But new research shows that hidden debt is a widespread problem.

[Weyland Wong]

Today on the show, the economists behind this research shine a light on this practice. They tell us where the money comes from and how secret borrowing can make life worse for ordinary people.

[Angel Carreras]

This message comes from Capital One. Say hello to stress free subscription management easily track block or cancel recurring charges right from the Capital One mobile app. Simple as that. Learn [e-mail] subscriptions terms and conditions apply.

[Gilly Moon]

This message comes from Greenlight. Parents rank financial literacy as the number one most difficult life skill to teach With Greenlight, the debit card and money app for families, kids learn to earn, save and spend wisely. Get started [e-mail] NPR this message comes from NPR sponsor Merrill. Whatever your financial goals are, you want a straightforward path there. But the real world doesn't usually work that way. Merrill understands that. That's why with a dedicated Merrill advisor, you get a personalized plan and a clear path forward. Go to ML.combullish to learn more. Merrill, a Bank of America company. What would you like the power to do? Investing involves risk. Merrill Lynch, Pierce, Fenner and Smith Inc. Registered Broker Dealer Registered Investment Advisor Member sipc.

[Darien Woods]

Sebastian Horn was recently drawn into a kind of economic mystery. He's a professor at The University of Hamburg in Germany. And he studies sovereign debt. That is the money that governments borrow.

[Sebastian Horn]

That we started to see very big discrepancies between, for example, what media reported on big deals, big infrastructure projects financed by debt, and then at the same time, statistics that didn't really seem to move all that much.

[Darien Woods]

By statistics, Sebastian means the official numbers on borrowing that the government's put out.

[Sebastian Horn]

And then at some point you realize, well, something's not. Not entirely right here. Something doesn't really add up.

[Weyland Wong]

Now, this would be the point in a detective story where the hardened private investigator stakes out an abandoned warehouse or something. But this is an economic mystery. So Sebastian and several other researchers went skulking around a database of numbers from the World Bank.

[Darien Woods]

Okay, so not so Hollywood, but still important work.

[Weyland Wong]

Fewer spiders. Probably fewer spiders.

[Darien Woods]

More lines of code, furiously tapped keyboards. And as you know, the World bank is an international organization that lends money to low income countries. And any country that owes money to the World bank is required to regularly report how much public debt it has. And this debt can be in the form of government bonds or loans made from one country to another.

[Weyland Wong]

The World bank has been collecting this data since the 70s. Sebastian and his colleagues tracked how countries revised their debt figures from year to year. They figured if the numbers went up, that would suggest that the governments were chronically under reporting their debt.

[Darien Woods]

And here's what the researchers found. They detected $1 trillion of hidden debt. It averaged out to 1% of each country's GDP.

[Weyland Wong]

Cesar Sosa Padilla is an economist at the University of Notre Dame in Indiana. He says these numbers show that hidden debt is a large and common problem for the nearly 150 countries that the researchers studied. These countries span the globe from Egypt to Pakistan to Thailand.

[Darien Woods]

I never suspected that this was so pervasive because this happens across all geographies and also through time, right? So it's not that it's just a new phenomenon. So yes, it was surprising to me. Now, when it comes to government statistics, revisions happen regularly. Like in the US There are always updates to the monthly job numbers or the quarterly figures for, say, gross domestic product.

[Weyland Wong]

CSER refers to these kinds of tweaks as revisions without drama. And he says most of the under reporting on debt falls in this category. It's not funny business at the finance ministry, but rather more mundane issues like a government just doesn't have the resources to track what every agency is doing.

[Darien Woods]

All right, but what about the revisions with drama? I want theatrics.

[Weyland Wong]

Well, get out your popcorn, Darian. There are cases where governments are borrowing money on the down low. The researchers found that money borrowed directly from other countries tends to be the most hidden kind of debt. It's not traded in financial markets the same way that, for example, government bonds are. So Sebastian says it's more easily concealed.

[Sebastian Horn]

There's a diplomatic visit and you sign a couple of contracts, and each of the parties treats it as a state secret. Well, it may well be possible to shield that from public scrutiny for a long time.

[Darien Woods]

One example of this kind of debt leading to big trouble is in the African country of Zambia. A few years ago, the government went into default. It turned out that Zambia had borrowed almost twice as much money from lenders in China than what was previously disclosed. When a new president took office, he said that the treasury was literally empty.

[Weyland Wong]

The researchers found that countries tend to rack up their secret debt in good economic times, and then the proverbial skeletons tumble out of the closet when there are economic downturns. This is because governments can get into trouble trying to pay the money back.

[Darien Woods]

And while Sebastian and Cesar focused on lower income countries for their study, they said higher income countries aren't above reproach. Remember the Greek economic crisis of 2009?

[Weyland Wong]

Now to Greece, a country on the brink of collapse. Banks shuttered, ATMs running out of cash.

[Darien Woods]

That came about after revelations of hidden debt there. Its crisis was part of a larger wave of economic instability in the region. A bunch of other countries in the Eurozone got sucked into the crisis.

[Weyland Wong]

One advantage that a higher income country does have is that it can better absorb the shock from a large amount of hidden debt. A country like Mozambique is more vulnerable. In the wake of the tuna bond scandal, the government went into default. Economic growth was cut in half, inflation surged, and by one estimate, nearly 2 million people were pushed into poverty.

[Darien Woods]

And this brings us to how hidden debt can hurt everyday people living in a country. When the borrowing comes to light, it can force a government to rebalance its books. And that could mean slashing social welfare programs, freezing wages for government employees, or raising taxes.

[Weyland Wong]

These kinds of policies are called austerity measures. And the government in Mozambique rolled them out. After the scandal. The head of a non nonprofit there told Al Jazeera about how these measures were playing out. Cuts were made to the health, education, water and sanitation sectors. And that had the direct impact in how people access medication, you know, how.

[Gilly Moon]

They access medicine, how they access health services.

[Weyland Wong]

And above all, I think the impact.

[Gilly Moon]

Has been in the pocket of the citizens.

[Darien Woods]

There were also some consequences for the officials behind the tuna bond scandal, including court cases in Mozambique, New York and London. Credit Suisse, the investment bank that helped arrange the secret loans, paid about $500 million in penalties and fines. This summer, a federal jury in the US Convicted Mozambique's former finance minister on fraud and money laundering charges.

[Weyland Wong]

As for those 24 tuna boats, you know, the ones that were supposed to create jobs for fishers in Mozambique. Last week there was an auction to sell off the fleet and not a single bid came in. Those boats are still resting in the harbor. Before we wrap up, we just want to thank everyone who supports us by giving to your local station or by joining npr. Everything the Indicator has done this year is because of your help.

[Darien Woods]

And if you're not familiar with npr, it's a great way to hear this. And more than 25 other NPR podcasts sponsor free. There are other perks too, like bonus episodes and discounts. At the NPR shop, you get all.

[Weyland Wong]

That for a small recurring donation and you get the sublime pleasure of knowing you are supporting NPR's mission of creating a more informed public. Just go to plus.npr.org for details. Again, that is plus.npr.org this episode was produced by Angel Carreras with engineering by Gilly Moon. It was fact checked by Sierra Juarez and edited by Kate Concannon. The Indicator is a production of npr.

[Angel Carreras]

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