Regular readers of this page were confused when after weeks of forecasts by analysts of the final participation rate between 60% and 65% in Ghana’s domestic debt restructuring exercise (DDE), the government successfully announced a figure of “more than 80%” this afternoon. .
We share our understanding on Twitter: the government determined to announce a high level of participation and thus tune any definition necessary to suit the purpose, especially by changing the participation rate equation. But why does participation rate even matter in the first place?
The only reason why a government, or a debtor, will seek to restructure their debt is because times are too difficult for them to pay on their original terms. Therefore there is a need to reduce the amount to be paid from time to time, whether in interest, principal, or both.
Thus, for debt restructuring exercises, two things are more important: the average number of haircuts and the participation rate. The participation rate, roughly speaking, is ratio from A) the face value of the restructured debt (so, in this case, the new bond) to B) the face value of the original, unpaid debt (or outstanding principal). “A” is the numerator and “B” is the denominator, resulting in the basic equation: A / B. The level of participation together with the number of haircuts therefore determines the overall debt debtamount of money stored by the debtor, in this case the government, as a result of not having to pay the debt according to the original, more severe, advanced terms.
When restructuring a debt, the debtor must be aware of all the debts can be restructured. This is what it is called eligible debt. Consider, for example, a person who wants to settle his personal debt after losing his job. The bank may be willing to repay the mortgage; friends can persuade to forgive the wedding loan; but the leasing company can refuse any adjustment to the terms of the car loan. In such situations, mortgage and wedding debts are eligible debts for the individual’s restructuring efforts.
When Ghana announced its debt restructuring exercise on December 5, 2022, it determined that the eligible debt under the DDE program was announced at approx. 137 billion GHS ($11 billion).
When the situation starts to get tough and the government is forced to revise its offer to entice more creditors, then the eligible debt is converted to approx. 130 billion GHS ($10.4 billion).
After several extensions, delayed concessions, and veiled threats failed to clear the faces of those unaware of the government’s strange and inexplicable failures before launching the restructuring exercise, panic set in.
The Ministry of Finance Mandarins hunkered down with expensive suits from Lazard Frères, high end government consultants in this exercise. Over the copious drinks and after much brainstorming, punctuated by the occasional stutter, a plan began to take shape. A ghostly smile etched on the corners of his lips as his simplicity and elegance were evident.
The plan is that the government will choose whatever debt number it wants when it wants to present the DDE results and do whatever it wants. A sizzle of self-congratulatory buzz around the room when the coup d’état. No one jumped up to do boogie-woogie, but the waltzing songs from the adjacent antechamber became very audible suddenly, stirring up some graceful head-bobbing.
Analysts who have tracked every step of the DDE meanwhile continue to publish frantic updates to the audience about the inevitability of the low participation rate, and thus the possibility of lackluster debt outturn. How naive. They completely misread the entrails. When a tenacious government is used to teaming up with expensive and experienced international consultants, poor results are impossible!
So later today, after the previous press release, the government issued another press release. There, the figure “more than 80%” has crystallized into a participation rate of “85%”.
On the second page, the abracadabra is shown in all its glory: the government has selected eligible debt is about 97 billion GHS ($7.6 billion) for the purpose of calculating the participation rate.
Talk about magical math!
Realizing that some nosy people can get around the numbers, vague explanations are thrown out. Essentially, the government has changed its mind about what debt is worth restructuring. At the end of the training. The end of the story.
But even amid the cursoriness, some analysts’ antennae are up. One brief justification of last-minute reductions in eligible debt is the claim that some investors have converted bonds into treasury bills. This can only be done with the permission of the government. But why?
A theory doing the rounds could be related to some swaps in which the government, most likely through the Bank of Ghana, is entangled. According to this theory, the derivative is tied to the bond’s discount, so any attempt to extend the bond’s maturity will lead to serial defaults.
Whatever the actual facts of the matter may be, and believe that it will be announced in the long run, regular readers can rest assured that the analysis of debt relief provided earlier still holds.
First, using the government marketable securities bracket (as shown in the debt exchange memorandum) as the denominator, one obtains the participation rate between:
83 billion GHS (new bonds) / 137 billion GHS (eligible original debt) = 60%
or
83 billion GHS (new bonds) / 130 billion GHS (in eligible debt modified program) = 63%.
Thus, analysts’ projections of a rate between 60% and 65% are stronger than the government’s expected 85%.
No problem right?
Well, look at what the government itself did after the exercise deadline. A day before the deadline, a junior Minister announced a 50% participation rate. After this was reported by the Press, friendly journalists were immediately briefed to start distributing the new 70% plus numbers. The junior minister was immediately instructed not to comment further. Government affiliates in the media then take over the narrative. This morning, that number was “over 80%”. It has finally dropped at 85%. Clearly, there is no need to go through all these hoops if the narrative is not important to the government.
The universal and enthusiastic reporting of “more than 80%” and “85%” participation rates in the mainstream press without nuance above is clear evidence that the participation narrative is very important to the government and mainstream audiences.
However, for more specialized observers (those most likely to pay attention to the type of detail that is often scrutinized in these pages), more accurate numbers are important for a clearer reflection of the evolving fiscal picture.
The success of government PR basically has nothing to do with those people.
Only the consequential analysis of debt relief is likely to be attainable from just completing the exercise of the matter. Diligent observers are more concerned about the fiscal hole of more than $2 billion in government affairs that we insist can only be addressed by a sincere program of “rationalization” of expenditures, independently monitored, because the current national budget does not go far enough. .
Of course, some secondary concerns also arise when one considers the sequence of events thus far. Some explanations from the government, despite themselves, also indicate some disorganization in the fixed income market. We have been warned before about the potential error rate of settlements due to haste, for example in relation to withdrawal requests that have not been processed too late. Some people who do not like the exchange of debt through the actions of fiduciaries, such as banks, have bared their teeth. In these circumstances, the risk of litigation still remains, even after the program has ended.
The government itself recognized the need to let go of the exercise with caution, and extended the settlement date until February 21 (to the anger of those who asked for a cure on February 17 of the temporary default on the old bonds). It has unilaterally revised the exchange agreement to give room to pursue additional exchanges and introduce mopping up instruments, among other close creative responses to the underwhelming performance of the debt exchange program.
In short, the miracle of government does not go beyond the act of spinning and threading that is now on display.
Source: Bright Simons, Vice President of Imani Africa